There are some books where I make tons of notes with marginalia, underlines, etc (Getting Everything You Can Out of All You’ve Got by Jay Abraham). There are some books I barely make any (Indistractable by Nir Eyal). This is one of the former cases. I could barely go a page without having notes to jot down.
The author explains the title in the first two pages, which I kinda love: iterating on an existing idea is taking something from 1 to n. Large, lasting companies are created when you take something from nothing to 1. (but, of course, since it’s never been done before, it’s not exactly easy)
Progress: Horizontal vs Vertical
One of the early points made sets the tone for the book: progress can be made in one of two ways in the world of business.
- Horizontal progress: Taking a thing that exists and doing more of it. Taking one typewriter and building 100 is horizontal progress.
- Vertical progress: Creating a new thing. Instead of creating more typewriters, you created the first word processor.
Neither approach is bad, neither is best, but each results in a different outcome. To build something grand and lasting, however, it has to be in the last group.
Positively defined, a startup is the largest group of people you can convince of a plan to build a different future. A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.
All Happy Companies Are Different
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.
I love this point because it really drives home that whole revenue vs profitability point. It’s not uncommon for, say, large construction companies, to have revenue in the multi-millions and create massive value for their clients, but for the company itself to little profit due to being unable to capture enough of that value for itself.
It’s largely believed SaaS is superior to services for the same reason, but it’s a pet theory of mine that it actually isn’t true in practice. (I should write that idea up one day).
The author goes on to discuss “perfect competition”, a state in economic theory where supply perfectly matches demand. In such a state, no business involved is actually making a profit as the economics will cause prices to be driven to the lowest point they can be while still being able to supply goods. His conclusion is that if you want to build a lasting enterprise, don’t build an undifferentiated commodity business.
The Ideology of Competition
The author warns quite strongly about rivalries in business, summing it up thusly: don’t fucking do it.
The problem with creating bitter rivalries is that you start to focus on beating the rival rather than building a truly great product. The example from his own past was PayPal: Peter’s company (PayPal) was incredibly focused on beating Elon’s company (X), but both realized that neither would be able to establish any sort of dominance in a reasonable timeframe. They finally decided it was in both companies interests to do a 50/50 merger and kill the rivalry entirely.
Rivalries cause us to overemphasize old opportunities and to slavishly copy what has worked in the past.
[Pets.com, PetStore.com, Petopia.com] was obsessed with defeating it’s rivals, precisely because there were no substantive differences to focus on. … Winning is better than losing, but everybody loses when the war isn’t one worth fighting.
These quotes made me think about the application and infrastructure monitoring world, a market I know extraordinarily well. That market segment is full of bitter rivalries with most companies deeply focused on beating whichever company they think is their rival. In doing so, they’re all copying each other, and even worse, they’re all rehashing old ideas with a new spin–to all of their detriments. Meanwhile, the only companies in the space who don’t give a damn about perceived rivalries are also, coincidentally, the most successful ones. Or, maybe it’s not so coincidental after all. (I’m also seeing the same situation with the cloud cost optimization space–everyone is focused on the easiest part of the problem and doing the exact same thing, meanwhile the most successful are playing an entirely different game.)
Why Valuations in Tech Are Wild
The author makes a comparison of Twitter vs New York Times. When Twitter went public, it was valued at $24bn, which was 12x more than the NYT’s valuation. NYT made $113mm in revenue that year and Twitter lost money–so why the high valuation?
The answer: tech companies are valued on future profits. Investors believe NYT’s market monopoly on news to be over with, so future profits will decline. However, investors believe(d) Twitter’s monopoly position to grow in the future. Quote, “The value of a business today is the sum of the value it will make in the future.”
Last Mover Advantage
Technology companies are fairly unique in that they often lose substantial amounts of money in their early days because it takes time to build something valuable. One side effect of this is that a tech company will tend to have extremely large cash flows far into the future. At the time of writing (2013), the author had calculated that despite being around since 1998, most of PayPal’s cash flow would still be beyond 2020–and that’s with substantial cash flows having already been occurring for decades.
The author posits companies like this have four traits:
They have proprietary technology
A company’s technology has to be 10x better than the current standard choice in some important dimension, otherwise it will be perceived as only marginal improvement and hard to sell. That doesn’t mean it has to be 10x better all-around, just 10x better in one meaningful way.
Creating something completely new is one way to do this, but you can also radically improve on an existing idea as well: accepting payments online was not a new thing when PayPal launched, but PayPal’s experience (thanks to the underlying tech) made it 10x better.
They have network effects
Rather than define it here, go read the Wikipedia article. It’s hard for me to see how this would map well to B2B businesses.
A great (and amusing-to-me) quote:
Paradoxically then, network effects businesses must begin start with especially small markets. Facebook started with just Harvard students–Mark Zuckerberg’s first product was designed to get all his classmate’s signed up, not to attract all people of earth. This is why successful network effects businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.
They have economies of scale
SaaS is often thought of as the best business model because of leverage resulting from economies of scale. With low-to-zero marginal cost for each new customer, a SaaS business can grow to service millions of customers with minimal additional operating costs. At the other end of the spectrum, services businesses often do not gain any improvements as a result of scaling up, making them quite difficult to turn into long-term, large businesses with outsized impact.
They have a strong brand
But, then again, you can’t build a company on brand alone.
Success isn’t luck
A few, like Steve Jobs, Jack Dorsey, and Elon Musk, have created several multibillion dollar companies. If success were mostly a matter of luck, these kinds of serial entrepreneurs probably wouldn’t exist.
The same case can be made for a lot of people outside of tech as well. Richard Branson comes to mind, for example. After some quick googling, I found a couple other notable people as well: Wayne Huizenga, who founded Waste Management, Inc, Blockbuster Video, and AutoNation, Gary Vaynerchuck, who currently runs both a media company and an ad agency, and previously ran Wine Library, among numerous other ventures.
Waldo Emerson captured this ethos when he wrote: “Shallow men believe in luck, believe in circumstances … Strong men believe in cause and effect.” In 1912, after he became the first explorer to reach the South Pole, Roald Amundsen wrote: “Victory awaits him who has everything in order–luck, people call it.”
This theme is a central aspect of Zero to One: if you believe success is mostly attributed to chance, why bother with improving yourself at all? The only working on yourself and your situation makes sense is if you also believe you can make a difference by doing so.
This particular chapter is quite possibly my favorite of the book, wherein the author muses about a fascinating problem: how much control do you have over your future?
He lays out four options in a square:
- Indefinite pessimism: “An indefinite pessimist looks out onto a bleak future, but has no idea what to do about it.” … “All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime.”
- Definite pessimism: “A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.”
- Definite optimism: “To a definite optimist, the future will be better than the present, if he plans and works to make it better.”
- Indefinite optimist: “To an indefinite optimist, the future will be better, but he doesn’t know how, so he doesn’t make any plans. He expects to profit from the future but sees no reason to design it concretely.”
The author points out that definite optimist dominated discourse in early America, but indefinite optimism has token over since the 1970s. What makes this particularly dangerous is actually what we’re seeing now with the Baby Boomer generation: they took a booming economy for granted. They didn’t do anything specific to create their future, but they lived through a booming economy nonetheless, ultimately mixing up cause and effect.
The entire argument also reminds me of Pascal’s Wager:
Pascal argues that a rational person should live as though God exists and seek to believe in God. If God does not actually exist, such a person will have only a finite loss (some pleasures, luxury, etc.), whereas he stands to receive infinite gains (as represented by eternity in Heaven) and avoid infinite losses (eternity in Hell).
It seems to me that the same thing can be said for how one should live their life. It would be better to live as if you have control over specific, future outcomes than not. If it turns out all that planning and hard work was for nothing, then you’ve lost nothing. If it turns it that you can impact future outcomes, then you have infinite gains. A similar argument is commonly made for action on climate change.
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 world is money a means to an end, not the end itself.
This is what really gets me about the explosion of multi-billionaires in the world. Money isn’t going to do anything for you when you’re dead, and when you’re sitting on several billion, you’re never in a situation where you can’t have anything you could possibly want; your life is as comfortable as you would ever desire and the cost of it has barely made a dent in the cash sitting there. So why hoard cash at all? Why not DO something with it?
Is indefinite optimism even possible?
Definite optimism works when you build the future you envision. Definite pessimism works by building what can be copied without expecting anything new. Indefinite pessimism works because it’s self-fulfilling: if you’re a slacker with low expectations, they’ll probably be met. But indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?
Founders sell when they’ve run out of ideas
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 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.
Every great company is founded on a secret
The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
I love this concept. It takes us back to the start of the book:
What important truth do very few people agree with you on?
Recall the business version of our question: what valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable.
Zero to One Requires a Team
It’s very hard to go from 0 to 1 without a team.
Founders should share a prehistory before they start a company together–otherwise they’re just rolling the dice.
A board of three is ideal. Your board should never be more than people, unless your company is publicly held. … A huge board will exercise no effective oversight at all; it merely provides cover for whatever microdictator actually runs the organization. If you want free rein from your board, blow it up to a giant size. If you want an effective board, keep it small.
As a general rule, everyone you involve with your company should be involved full-time. … Anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biases to claim value in the near term, not help you create more in the future. … Ken Kesey was right: you’re either on the bus or off the bus.
A company does better the less it pays the CEO–that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups. In no case should a CEO of an early-stage venture-backed startup receive more than $150,000 per year in salary.
High compensation [for employees] teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future. … Any kind of cash is more about the present than the future.
Startups don’t need to pay high salaries because they offer something better: part ownership of the company itself. 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 aligned.
I’m pretty cynical on this idea of equity being the only true answer. How many startups have an exit and the employees walk away with pennies, if anything? I’d say it’s more common than not. It feels exploitative.
Sales looks easy from the outside
People overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
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. … There’s a reason for these redescriptions: none of us wants to be reminded when we’re being sold.
How to sale a product
In general, the higher the price of your product, the more you have to spend to make a sale–and the more it makes sense to spend it.
Most sales are not particularly complex: average deal sizes might range between $10,000 and $100,000, and usually the CEO won’t have to do all the selling himself. The challenge here isn’t about how to make any particular sale, but how to establish a process by which a sales team of modest size can move the product to a wide audience.
In between personal sales (salespeople obviously required) and traditional advertising (no salespeople required) there is a deadzone.
The author makes an interesting point with this observation: the deadzone is a result of the price being too low to support sales staff but the market lacking a place where advertising can be effective.
This is why so many small and medium-sized businesses don’t use tools that bigger firms take for granted. It’s not that small business proprietors are backwards or that good tools don’t exist: distribution is the hidden bottleneck.