The Challenge of the Future
Peter Thiel segregates progress into two distinct forms viz Horizontal progress and Vertical progress.
Horizontal Progress refers to small incremental progress in a field in terms of economic activity. Companies following horizontal progress simply imitate others. Thiel calls this pattern one to many.
Vertical Progress refers to achieving dimension shifting progress in a field i.e. a progress which gives the company unique competitive advantage. It is achieved either by inventing something novel, or by tremendous unusual improvement in a field. According to Thiel this pattern is referred as “Zero to One.”
Party like It’s 1999
In this chapter, the author highlights the psychology of both the entrepreneurs and investors behind dot com bubble in the late 1990s.
Entrepreneurs and investors took four learnings from this event:
1. Incremental changes are the safe path.
2. Lean and Flexible
3. Improve on competition
4. Product is more important than sales
Thiel advocated and asserted that entrepreneurs and investors took the wrong learning from the dot com bubble. Therefore, Thiel listed following learnings:
1. It is better to risk boldness rather than negligible things.
2. It is always better to have a bad plan rather no plan.
3. Competitive markets destroy profits.
4. Sales matter as much as product.
Thiel wants the reader to think for themselves because reactions to past mistakes can be as wrong as the mistakes made. So, try to adopt a pragmatic approach.
All Happy Companies Are Different
According to Thiel, one of the biggest economic lie told by the economists is that the state of perfect competition leads to market equilibrium.
The reality is, there is no perfect competition, and it eats away from the same pool of potential profits. Let’s consider the case of Google. It is advocating responsible business ethics since its outset. However, it’s made possible due to the fact that Google enjoys a monopoly in the internet search market. In contemporary times, we seldom hear someone saying let me Bing that?
Non-monopolist exaggerates their uniqueness by describing their target market as the intersection of various smaller markets.
In contrast, monopolist disguises their monopoly status by describing their target market as the union of large sectors. Monopoly is the condition of every successful business.
Ideology of Competition
It’s not only the economists that are fooled by competition; our society is driven by it!
Bright students at a young age start competing for admissions to elite institutions. Once they reach there, competition intensifies. Once they land at prestigious jobs, competition reaches new heights. This vicious circle continues until the intensity of competition reaches to a level that sucks life out of them.
Competitive attitude leads to a situation of war, which can turned out to be a costly business both in terms of time and resources. So it is always advisable and worthwhile to avoid war. In the case that war is worth having, and then you should strike hard and end it quickly. There are no half measures in war.
Last Mover Advantage
One of the ways to escape competition is to build a monopoly, but it should be defensible.
The characteristics of a Monopoly as listed by the author are:
1. Proprietary Technology
2. Network Effects: As the number of users increase, it makes the product as a whole more valuable. As more people join the network, it becomes more valuable and further enhances the monopoly position.
3. Economies of Scale: Firms get stronger as sales grow because fixed costs can be spread over a larger quantity of sales.
4. Branding: Every company has a divine right to monopoly with their branding. A strong brand connection and faith built over time with customers is a powerful way to obtain monopoly.
So Thiel advises startups to start with small, well-defined target demographics which are clustered in a small geographical area.
Large markets come with cut-throat competition. For instance, Amazon started by selling books, then moved into DVDs and CDs before it became a store of everything. Lastly, avoid disruption because Media is obsessed by disruptive technology. Disruption attracts the attention of competitors as well as regulators.
You Are NOT a Lottery Ticket
This chapter discusses the four different attitudes to future:
1. Definite optimism: Future can be predicted and it will be better.
2. Indefinite optimism: Future can NOT be predicted but it will be better.
3. Definite pessimism: Future can be predicted and it will be worse.
4. Indefinite pessimism: Future can NOT be predicted and it will be worse.
Only hardwork and smart work makes you luckier. Victory awaits him who has everything in order.
Western world is in a state of indefinite optimism right now, compared to definite optimism of the Renaissance, Age of Enlightenment and Industrial Revolution period. Lack of concrete plans make people to hold a portfolio of various options. This is the dominating viewpoint of Western world now.
Thiel advocates for the definite optimism. That’s how great companies will be built.
Follow the Money
In this chapter Thiel introduces the well-known Pareto Principle also known as the power law or 80/20 rule.
Italian economist Vilfredo Pareto showed that 20% of population owned 80% of the land in the country like in business management field wherein 80% of your sales comes from only 20% of your clients.
In order to maximize process efficiency, you should focus on 20% of the opportunities which would return 80% of the gains.
Whenever you plan to spend some time taking an action, think of the 80/20 rule. That is, take fewer actions with bigger impact.
This chapter states that secrets are the magic ingredient which makes a business great. Great companies might become a source of conspiracy because when you share your secret the recipient becomes a fellow conspirator.
In order to uncover secrets, you should be looking for them. Many say there are no secrets left in the world to discover and that’s exactly why they won’t be finding any.
If you ever come across a secret then you either keep it to yourself, or you share it with others. The author suggests that it is always better to keep some secrets rather than telling everybody everything you know.
This chapter focuses on the Founding principles because it is difficult to change them once set.
It is very important to have a strong foundation. You would not start a company with a stranger. Complementary skill sets and personalities of founders matter, but how well founders know each other and how well they work together matter.
The dealignment in the following three dimensions leads to conflicts in startups:
1. Ownership- who legally owns company’s equity. (founders, employees and investors)
2. Possession- who controls day to day operations of the company. (founders and employees)
3. Control – who formally govern company’s affairs (board of directors and founders)
So adequate representation of each stakeholder in your startup should not be ignored.
Boardroom of a Startup
The author suggest a board of 3 is ideal for private companies. It is because it is easier for directors to communicate, reach consensus and to exercise oversight in smaller boards. However, it is quite easy for small boards to object management easily.
Cash is NOT King
You should avoid cash incentives and bonuses because it will encourage short term thinking rather than long term value creation. In such scenarios equity is considered a preferable medium so as to keep all stakeholders aligned for long term vision. So either by taking the lowest salary or a modest one, a CEO should also set an example.
Thiel quotes a noticeable story of Aaron Levie, CEO of Box. Four years after founding Box, he paid himself lower than everyone else, lived in a one bedroom apartment 2 blocks from the office. Thus, this shows good CEOs lead by example.
The Mechanics of Mafia
Thiel advocates that you should focus on hiring like-minded people with similar interests and similar passion regarding the problem domain you’re working on.
In order to foster a strong culture, Thiel proposes attention to these 4 dimensions:
2. Slogans: Catchy-phrases and inside jokes help foster stronger relations among the team members.
3. Advocacy: Is your company actively publicizing its efforts towards your problem?
4. Obsession: Are team members obsessed regarding solving the problem?
If You Build It, Will They Come?
This chapter focuses on measures to increase your sales. Advertising doesn’t make you buy a product instantly, but it creates recurrent subtle impressions which will drive sales in future.
If you have invented something but you haven’t figured out a way to distribute it, you have a bad business on your hands.
How to sell a product?
For assessing effective distribution one need to keep an eye on two metrics. viz Cost of Acquiring a customer (CAC) and Customer Lifetime Value (LTV).
To have a profitable business, you’ll need to satisfy this equation:
LTV > CAC
Lifetime value extracted from a user should be higher than the cost of acquiring them.
Depending on the value of each product/service you sell, your distribution effort would fall somewhere in the below mentioned spectrum:
1. Complex Sales
Deal Size: $1m – $100m
Target: Government, Public Corporations etc.
If the deal size ranges from $1m to $100m, CEO needs to be involved at every such deal.
2. Personal Sales
Deal Size: $10k – $100k
Target: Consumer or Companies
3. Dead Zone Sales
Deal Size: around $1k
Since, the target audience is likely to be small businesses rather than individuals, conventional forms of advertisement is hard to exploit as well. 4. Small Sales
Deal Size: around $100
Target: Individuals or businesses. Traditional sales and marketing channels are effective for this type of deals.
5. Viral Sales
Deal Size: around $1
Target: Individuals. This will be achieved by leveraging network effects.
This is called the “power law of distribution” i.e you need to pursue channels which determine majority of your sales.
Man and Machine
Thiel’s outlook regarding AI is optimistic as, he beliefs, man and machine have complementary skill sets and will build the future by working together. Palantir – Thiel’s new company is adopting a hybrid approach, which uses AI/ML driven techniques to gather and analyze data, but relies on human analysts to provide causal explanations and unique insights. Machines can’t replace humans instead it will empower them.
Thiel states that the Clean-tech bubble failed to deliver results because these companies failed to answer any of 7 questions which every business needs to answer.
1 – The Engineering Question
Is it possible for you to create path breaking technology/ innovation instead of incremental improvements?
2 – The Timing Question
What is the correct time to start your particular business?
3 – The Monopoly Question
Are you starting with a defensible market share for your product?
4 – The People Question
Do you posses the required competent team?
5 – The Distribution Question
Do you have the right approach to deliver your product apart from creating it?
6 – The Durability Question
Will you be able to sustain your position in the market in coming 10-20 years?
7 – The Secret Question
Do you posses a unique idea that others don’t see?
If you don’t have reasonable answers to these seven questions then you’ll run into failure. But if you nail all 7, you’ll master fortune and success.
The Founder’s Paradox
If you have extreme character qualities you’ll find yourself in the company of such people, which will further enhance those qualities.
The paradox of being a founder is that they might seem poor and rich, genius and idiot or hero and villain at the same time. So be tolerant of the extreme qualities of founders, this is how they can lead companies beyond mere instrumentalism.
Conclusion: Extinction or Singularity
According to Thiel, there are only 2 possible options for existence of humanity.
First one is that, we’ll go into a horrible decline with the extinction of humankind due to global warming, populist politics, nuclear war and global famines. The other option is, the rate of advancement of technology will keep accelerating leading to an exponential take-off.
Nobody can predict the future, but we all play our parts to shape the earth.
Now the question is what part will you play?