"The single most powerful pattern I have noticed is that successful people find value in
unexpected places, and they do this by thinking about business from first principles instead of
formulas."
"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."
"Even more important than nimbleness, small size affords space to think."
"When a big company makes an offer to acquire a successful startup, it almost always offers too
much or too little: 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."
The benefits of monopolies
Perfectly competitive businesses do not have surplus to innovate or focus on research. The
reward of a decade of monopoly profits provides incentive to innovate.
"Creative monopolists give customers more choices by adding entirely new categories of abundance
to the world. Creative monopolies aren't just good for the rest of society; they're powerful
engines for making it better."
In a static market, monopolies collect rent at the expense of consumers. But in the real world
they are innovating and creating new markets.
"The history of progress is a history of better monopoly businesses replacing incumbents."
You want to dominate a market for years, collecting monopoly profits. To do so you don't
necessarily need to be first; that's a tactic. You do need to be the last significant innovation.
"When people lack concrete plans to carry out, they use formal rules to assemble a portfolio of
various options", rather than bringing about a definite vision.
"Would-be entrepreneurs are told that nothing can be known in advance: we're supposed to listen
to what customers say they want, make nothing more than a 'minimum viable product,' and iterate
our way to success."
"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 an effective way to sell it, you have a bad
business — no matter how good the product."
There are many secrets. Just dream of all the things that we don't have today — you'll find ideas
like Uber, Airbnb.
"On the bus or off the bus" — regarding consultants: "Anyone who doesn't own stock options or
draw a regular salary from your company is fundamentally misaligned. At the margin, they'll be
biased to claim value in the near term, not help you create more in the future. That's why hiring
consultants doesn't work."
Why should someone join you instead of FAANG? "The only good answers are specific to your company,
so you won't find them in this book. But there are two general kinds of good answers: answers
about your mission and answers about your team."
"Be the Google of 1999, not the Google of 2014" when pitching candidates.
Preface
0 to 1 is a new innovation. 1 to n is "adding more of something familiar."
"The single most powerful pattern I have noticed is that successful people find value in
unexpected places, and they do this by thinking about business from first principles instead of
formulas."
"A concrete formula for innovation cannot exist."
The challenge of the future (chap 1)
Vertical vs. horizontal progress (doing new things vs. copying things that work)
"If you take one typewriter and build 100, you have made horizontal progress. If you have a
typewriter and build a word processor, you have made vertical progress.
Globalization is an example of horizontal progress.
"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."
"Even more important than nimbleness, small size affords space to think."
Party like it's 1999 (chap 2)
(A discussion about how many of our best practices are shaped by mistaken reactions to the past.
E.g. lean startup, unambitious incremental progress, avoiding the creation of new markets)
Don't be afraid to question or abandon the current wisdom.
All happy companies are different (chap 3)
Monopolies are a more productive model for innovation.
All failed businesses are alike in that they failed to escape competition.
A valuable company creates lots of value in the world in dollars (X), but also captures it (Y).
Airlines vs. Google: both delivered huge value, but Google captured much more of the value it
created (it has a larger Y).
A good monopoly: a company so good that no other firm can offer a close substitute.
This definition excludes anti-competitive bullies, and state-sponsored companies.
Businesses are closer to the extremes (monopolies vs. fully arbitraged by competitors) than we
typically perceive. This is because no company wants to be perceived as a monopoly (to avoid
antitrust), or perceived as a commodity.
Monopoly lies: redefining their core market to be much larger, to appear less dominant.
Competitive lies: define a market unrealistically narrowly, to have a viable path to dominance.
"Non-monopolies exaggerate their distinction by defining their market as the intersection of
various small markets."
"Monopolists, by contrast, disguise their monopoly by framing their market as the union of several
large markets."
"The competitive ecosystem pushes people toward ruthlessness or death. A monopoly like Google is
different. Since it doesn't have to worry about competing with anyone, it has wider latitude to
care about its workers, its products, and its impact on the wider world."
"Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly
profits."
I.e. perfectly competitive businesses do not have surplus to innovate or focus on research. The
reward of a decade of monopoly profits provides incentive to innovate.
"Creative monopolists give customers more choices by adding entirely new categories of abundance
to the world. Creative monopolies aren't just good for the rest of society; they're powerful
engines for making it better."
In a static market, monopolies collect rent at the expense of consumers. But in the real world
they are innovating and creating new markets.
"The history of progress is a history of better monopoly businesses replacing incumbents."
"Every business is successful exactly to the extent that it does something others cannot."
"All happy companies are different: each one earns a monopoly by solving a unique problem. All
failed companies are the same: they failed to escape competition."
The ideology of competition (chap 4)
"Creative monopoly means new products that benefit everybody and sustainable profits for the
creator."
"Elite students climb confidently until they reach a level of competition sufficiently intense to
beat their dreams out of them. Higher education is the place where people who had big plans in
high school get stuck in fierce rivalries with equally smart peers over conventional careers like
management consulting and investment banking."
Last mover advantage (chap 5)
You want to dominate a market for years, collecting monopoly profits. To do so you don't
necessarily need to be first; that's a tactic. You do need to be the last significant innovation.
"The value of a business today is the sum of all the money it will make in the future."
Twitter is more valuable than Times because Twitter has a future where it will capture monopoly
profits for many years. Times doesn't.
For companies which will endure (PayPal, LinkedIn) high multiples are justified because most of
the cash flows will occur in the future.
"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."
Since durability is hard to estimate and measure, we instead use growth rate to benchmark a
business. But that's misleading. Groupon and Zynga had high growth rates as they went public.
Characteristics of a monopoly
Proprietary technology
To qualify, you must be 10x better.
Examples: Google search, PayPal, Apple iPod.
Ways to get 10x: solve a problem for the first time; scale the solution 10x; be an integrated
solution.
(He believes integrated solutions are an under-tapped way to achieve this).
Network effects
Developer ecosystem
You can achieve this by bootstrapping a two-sided network or marketplace by starting with a
niche. Facebook and Harvard.
Economies of scale
Service businesses lack this, and so it's hard for them to become monopolies.
Branding
E.g. Apple: materials, stores, Jobs' halo, design. Built on top of a lot of substance.
On returning to Apple, Jobs "slashed the product lines to focus on the handful of opportunities
for 10x improvement."
To start, monopolize a tiny (but existent) market
"the perfect target market for a startup is a small group of particular people concentrated
together and served by few or no competitors."
1% market penetration isn't a monopoly position.
"This is why it's always a red flag when entrepreneurs talk about getting 1% of a $100 billion
market."
Then, scale up: conquer adjacent markets
Amazon: the vision was to dominate online retail, and they started with books.
Don't disrupt
The act of creation of a new product or market is relatively more important than upending an
existing market. "Disruption" invites a competitive battle.
"Indeed, if your company can be summed up by its opposition to already existing firms, it can't
be completely new and it's probably not going to become a monopoly."
PayPal wasn't positioned to be disruptive; they didn't want to invite a fight with Visa, even
though they were building in that direction.
You are not a lottery ticket (chap 6)
Believe in a definite rather than indefinite future. One that you will need to bring about with
the work of your hands. This encourages ambition, proactivity, and a mindset of hard work.
"From the Renaissance and the Enlightenment to the mid-20th century, luck was something to be
mastered, dominated, and controlled."
"Focus on cause and effect."
"When people lack concrete plans to carry out, they use formal rules to assemble a portfolio of
various options", rather than bringing about a definite vision.
"By the time a student gets to college, he's spent a decade curating a bewilderingly diverse
resume to prepare for a completely unknowable future. Come what may, he's ready — for nothing in
particular."
"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."
Mindset
Definite: "the future will likely be X, and we can make it so."
Indefinite: "the future is unknown; we'll react when it arrives."
Categorizing recent history
Definite and optimistic: US, 1950s-1960s (space age)
Indefinite and optimistic: US, 1982-present
Definite and pessimistic: China, present
Indefinite and pessimistic: Europe, present
(Would definite/indefinite be better framed as proactive vs. reactive?)
"To a definite optimist, the future will be better than the present if he plans and works to make
it better."
A simple if-then mental model.
Indefinite optimism
Thiel believes this is the dominant American viewpoint, for the boomers.
It encourages tracked careers, and incremental improvement of what we have today.
"Instead of working for years to build a new product, indefinite optimists rearrange
already-invented ones. Bankers make money by rearranging the capital structures of already
existing companies. Lawyers resolve disputes over old things or help other people structure their
affairs."
"Finance epitomizes indefinite thinking because it's the only way to make money when you have no
idea how to create wealth."
Under indefinite optimism, the government's role is to provide insurance to the citizens, rather
than coordinating ambitious plans to engineer material improvements to the nation.
"In business, arguing over process has become a way to endlessly defer making concrete plans for a
better future."
He slams biotech startups as making poor progress because of many factors, but most of all an
indefinite attitude — "See what sticks; try things at random."
This is why U.S. companies have so much cash on their balance sheets. They don't know what to
invest in because they don't have concrete plans for the future.
"Would-be entrepreneurs are told that nothing can be known in advance: we're supposed to listen to
what customers say they want, make nothing more than a 'minimum viable product,' and iterate our
way to success."
Apple is an inspiration because of their ambitious multi-year plans, not their diligent iteration
or aesthetic design.
"When a big company makes an offer to acquire a successful startup, it almost always offers too
much or too little: 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."
On Facebook rejecting Yahoo's $1B offer, "a business with a good definite plan will always be
underrated in a world where people see the future as random."
"We have to find our way back to a definite future, and the Western world needs nothing short of a
cultural revolution to do it."
In VC, startups, and potentially elsewhere, this means some companies and markets make up the vast
majority of value. Facebook, Google, Apple.
People don't think or observe in power law terms, and make irrational decisions because of it.
"Since nobody wants to give up on an investment, VCs usually spend even more time on the most
problematic companies than they do on the most obviously successful."
But this means the firm focuses on the average portfolio companies, which is a poor investment
if only one or two of the investments have the potential to return the fund.
Because VC returns are based on funding a company in the head of a power law distribution,
diversification is not a useful goal for VC funds.
"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. At college, model students obsessively hedge their futures by assembling a suite of
exotic and minor skills."
"You can't trust a world that denies the power law to accurately frame your decisions for you, so
what's most important is rarely obvious."
Secrets (ideas) (chap 8)
This chapter is about modeling innovation as "secrets" that you can discover.
"What valuable company is nobody building?"
Argues that modern society believes there are no "hard secrets" left. There are no blank spaces on
the map.
"Anyone who might have had the ambition to look for a secret will first ask himself: if it were
possible to discover something new, wouldn't someone from the faceless global talent pool of
smarter and more creative people have found it already? This voice of doubt can dissuade people
from even starting to look for secrets in a world that seems too big a place for any individual to
contribute something unique."
People think, the world is flat, and the good secrets have already been discovered.
There are many secrets. Just dream of all the things that we don't have today — you'll find ideas
like Uber, Airbnb.
"The best place to look for secrets is where no one else is looking" — not within established
majors.
Foundations (about founding logistics) (chap 9)
Founders: have a strong prehistory.
Three people is an ideal-sized board.
"On the bus or off the bus" — regarding consultants: "Anyone who doesn't own stock options or
draw a regular salary from your company is fundamentally misaligned. At the margin, they'll be
biased to claim value in the near term, not help you create more in the future. That's why hiring
consultants doesn't work."
"Cash-poor executives" aligns motivations to grow the company at all costs.
"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."
"Equity is the one form of compensation that can effectively orient people toward creating value
in the future."
"Anyone who prefers owning a part of your company to being paid in cash reveals a preference for
the long term and a commitment to increasing your company's value in the future. Equity can't
create perfect incentives, but it's the best way for a founder to keep everyone in the company
broadly aligned."
The mechanics of mafia (chap 10)
By mafia, he means a company culture where people build links and relationships for the long-run,
which will outlive the current company.
Thiel's job before PayPal: "The lawyers I worked with ran a valuable business, and they were
impressive individuals one by one. But the relationships between them were oddly thin."
7 people from PayPal have founded $1B+ companies.
"Since time is your most valuable asset, it's odd 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."
A career optimization: "I thought stronger relationships would make us not just happier and better
at work but also more successful in our careers even beyond PayPal."
"Recruiting is a core competency for any company. It should never be outsourced."
Why should someone join you instead of FAANG? "The only good answers are specific to your company,
so you won't find them in this book. But there are two general kinds of good answers: answers
about your mission and answers about your team."
The main pitch element to your 20th hire should be: the team.
"Be the Google of 1999, not the Google of 2014" when pitching candidates.
"Internal peace is what enables a startup to survive at all."
Internal conflict is like an autoimmune disease. he says defining clear roles where every person
was uniquely responsible for one thing reduced conflict.
"You don't need to worry if your company doesn't make sense to conventional professionals. Better
to be called a cult — or even a mafia."
(A culture of extreme dedication is productive, passionate. It's one's work, which is a big
portion of one's waking life. The opposite is a consulting firm, where one goes to exchange time
for money with little care for the actual work or the projects you're contributing to.)
If you build it, will they come? (distribution) (chap 11)
You need distribution. It's half of the product.
A founder must be a great sales person: internally, in recruiting, for PR, and to customers.
In the valley there's a cognitive bias against the importance of distribution, and sales people in
particular.
"Whatever the career, sales ability distinguishes superstars from also-rans."
Deal-makers, self-promoters, in academia, engineering — everywhere.
"Even the agenda of fundamental physics and the future path of cancer research are results of
persuasion."
"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 an effective way to sell it, you have a bad
business — no matter how good the product."
"Success because of product quality" never happens.
(There's a helpful chart that shows CAC vs. target markets; the dead zone is a CAC of $1,000
because it's too expensive for mass appeal products, and too small to warrant sales.)
Complex sales limit your growth rate, because the cycles are long and you need to progressively
build up a reference pool of customers of increasing size.
Palantir's sales engine: "Our deal sizes range from $1 million to $100 million. At that price
point, buyers want to talk to the CEO, not the VP of Sales."
Think of marketing and advertising as a big megaphone, to maximize reach.
PayPal achieved viral growth by paying people to sign up, and paying them to refer friends. Their
CAC was $20 because that was the referral bonus they paid.
They went after acquiring the high-velocity power users on eBay, rather than e.g. immigrants
wiring money back home.
The power law of distribution
"One of these (distribution) methods is likely to be far more powerful than every other for any
given business: distribution follows a power law of its own."
Businesses typically only get one distribution channel to work, if any. The kitchen sink
approach doesn't add value.
A great company appears attractive to outsiders and recruits because of the selling work, not
because of the product quality.
"Nerds who instinctively mistrust the media often make the mistake of trying to ignore it."
Consider having a public relations strategy, even if you don't need it for customer acquisition.
"The press can help attract investors and employees."
Man and machine (chap 12)
An essay about how we should build tools to enhance human productivity, and not think of machines
as purely eliminating jobs.
"Machines becoming more sophisticated and eliminating jobs is very different, and much better, than
the same happening due to globalization."
"Computers are tools, not rivals" (unlike globalization).
Seeing green (chap 13)
The failure of cleantech from 2006-2012, analyzed using the framework for entrepreneurial success
presented earlier in the book.
Incremental improvement doesn't sell easily
No cleantech solutions offered 10x improvements in efficiency or cleanliness at the same cost.
"Even if your system really is 20% better on net for the customer who buys it, people are so
used to exaggerated claims that you'll be met with skepticism when you try to sell."
Cleantech companies compete for a huge competitive global energy market, and it's misleading to
realistically size their market prospects against that market.
"Cleantech executives were running around wearing suits and ties. This was a huge red flag,
because real technologists wear T-shirts and jeans. So we instituted a blanket rule: pass on any
company whose founders dressed up for pitch meetings."
Cleantech companies had poor answers for why they would be around and dominant in 10 years. Solar
panel pricing from China, and natural gas fracking killed many of them.
"Great companies have secrets: specific reasons for success that other people don't see."
Cleantech companies based their plans on excitement and a broadly recognized need for clean
energy, not an actual, specific secret insight.
Tesla as a successful case study
"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."
Versus nonprofits who all pursue undifferentiated strategies to achieve a big goal like clean
energy.
"Special forces"
"If you're at Tesla, you're choosing to be at the equivalent of Special Forces. There's the
regular army, and that's fine, but if you are working at Tesla, you're choosing to step up
your game."
Most cleantech companies underestimate distribution, but Tesla took it seriously, going directly
to consumers and owning the sales process, like Apple did.
"Tesla built a unique brand around the secret that cleantech was even more of a social
phenomenon than an environmental imperative", and it started with luxury.
The founder's paradox (chap 14)
Jobs preferred closed systems; Gates preferred open.
"Founders are important not because they are the only ones whose work has value, but rather
because a great founder can bring out the best work from everybody at his company."