Startup lecture notes in Stanford
Peter Thiel taught a startup course CS183 in Stanford University. Blake Master was his student. His lecture notes essay were compiled and refurbished into the book, Zero to One.
Zero to One is about what Thiel has learnt from co-founding PayPal and Palantir, investing in Facebook and SpaceX.
Thiel’s favorite interview question
“What important truth do very few people agree with you on?”
This question prompts people to talk about knowledge that are unique to us, even if saying it might make us socially unpopular. A good answer could take the form: “Most people believe in x, but the truth is the opposite of x.”
Startups are looking for people with courage, rather than merely brillant thinkers. It is challenging to imagine something that does not yet exist, even more so to engineer future solutions for problems that have not yet happen. Try to look for solutions where no one else is looking at, like how Andrew Wiles proved Fermat’s Last Theorem.
Horizontal and vertical progress
A startup is the largest group of people that are convinved of your plan to build your future, which differs from everyone else’s. The future can be envisaged as a definitive vision where it will inevitably happen. Horizontal progress (1 to n) and vertical progress (0 to 1) bridge the present and future.
Horizontal progress is doing what is already familiar, yet trivial and petty. Doing what is known is 1 to n. It is making what works into thousands. This is how factories mass manufacture products. If you improve on something that has succeeded, it would be akin to adding 0.01% to 99.99%. The A to Z progress is negligible and inconsequential, yet easy to replicate. Globalization is an epitome of horizontal progress.
China’s late entrance to the world economy could follow the horizontal progress that United States has done over the last few decades. Or it could develop its own vertical progress in technology and culture.
Vertical progress is creating something new, making a leap from 0 to 1. Vertical progress is hard because it involves something not done before. There could be gazillion methods to reach the definitive vision for the startup. If the startup can produce goods and services better than everyone else, it can monopolize specific niches and expand into broader markets. It is easier to gain profits at a specific niche at first, expand later into broader niches. Technology and cultural revolution is an examplary model of vertical progress.
Thiel’s stance is that the future belongs to things that contribute to vertical progress, such as technology, and depend less on things that merely progress horizontally like globalization. Other animals build things up like dams or honeycombs. Humans invent new things and better way to make them.
As easy as it may seem, many tech predictions that people made in the last 10 years did not pan out as predicted. If we trust in our definitive vision of future, then it is only the amount of time it takes for the vision to actualize that we cannot foresee. Such is the planning fallacy we are optimistically biased to, in that time and effort of a task are often underestimated. Uber flying cars, electric cars, AI self-driving cars and Elon Musk’s hyperloops that zip people through tubes, will undoubtedly be a lot safer and reliable for people to travel, , if these tech predictions were to come true.
If large business is going to succeed, it needs thousands of miracles, which can be brought forth with technology. Unless big companies invest in creating new things, they will fail to reinvent themselves. Successful business creates something new that the market wants and values. Companies should find new paths to venture, not just fine-tuning what is already considered a success.
Business offers something the market wants, at a price the customers are willing to pay, to earn enough profit to sustain its normal operation. Successful people find value in unexpected places, and think about business from first principles.
Thiel bases his hiring decision on whether someone is fully on board, or not. The considerations of part time employees, remote workers or external consultants do not weigh as much as those of full time employees. The less the company pays its CEO, the better the company fares. Thiel fears that CEO with high salaries would behave more and more like politician defending the status quo, instead of getting moonshots achieved.
Monopolists and non-monopolists
Non-monopolist amplify their uniqueness and exoticism by defining their niche market as the center intersection of smaller markets.
Monopolists define their niche market as the union of larger markets. Google is a small fish in a big pond. Google monopolies search engine, maps, smartphones, wearable computers and self-driving cars.
Strive to be a monopoly
Google is the search engine monopoly. Monopoly is a company doing something so good that no one else can offer anything close to it.
Monopolies do not need to worry about generating how much profit. There would always be an excess of profit to allow Google to give back to society as philanthropy. Google can even treat its employees much better by allowing their personal creative projects to fluorish along with their day jobs. Google can also invest in innovative technologies and fund new, creative projects.
Google markets itself as the organization that delivers free internet for everyone. Google maps and self-driving cars are examples of propriety technology. By monopolizing the internet market, Google stays in business for as long as possible.
All happy companies are different. Each happy company solve a pestering, longstanding problem, by introducing life-changing products or services. The company earns a monopoly by creating unique solutions. Monopolies are non-dominant and have broadly big markets. Normal companies dominate narrowly small markets.
Happy employees love the company and their job to the extent of not checking time to go home. The perfect hires are excited to work with your company because they are already alligned with your team, culture and mission. It might even grow into a cult. Thiel believes that a cult or mafia is better than having no company culture at all.
Four monopoly methods
- Brand association. Apple is a fashionable brand.
- Propriety technology. Google is a search engine that gives search results that are ten times better than elsewhere.
- Network effects. Facebook and Instagram are the monopoly of social network because your friends are all up there.
- Economies of scale. Amazon offers free international shipping of sofa. Infrastructure cost drops and international shipping fees are lower than smaller companies.
When you market and advertise a new thing, you are trying to sell it and build awareness around it. Without awareness of your product, people would barely know its existence. A great product without marketing and sales would lose its appeal and spread. Startups should care about sales as much as they care about their new products. Peppered with strategic marketing and tactical sales, the product could potentially go viral and contagious.
Computers are complementary to human beings. There is no worry that computers might one day substitute human beings.
Dot.com bubble in 1994 to 2000 taught United States that it is better to:
- Risk boldness: 10x and moonshots
- Have a bad plan than no plan
- Create new markets, not new competitors
- View sales as equally important as the product
Clean and green tech bubble
Green tech and engineering have experienced difficulty to fluorish because biotech startups are subjected to uncontrollable organisms in random manner while software startups have perfectly determined code through definite approach. Biotech startups might not fully understand the natural environment, yet software startups can easily understand the artificial environment.
Biotech startups are heavily regulated while software startups are basically unregulated. The cost to biotech startup is expensive, while software startups are cheap. They need just a little bit of seed money. Biotech startups are governed by high-salaried people and expensive lab drones, while software startups are largely managed by entrepreneurial hackers.
Thiel suggests dominating the green tech market first, before going big. For instance, Facebook started from a Harvard dorm room. Then universities. Then global. Huge markets are highly competitive, so monopolies need to get great at something rare and valuable, to dominate the market.
Green tech business has to engineer breakthroughs with a good team of people. You have to monopolise the market and distribute the product or services at the right time. Once the market for your product or services is defensible for another ten years, it will turn into a unique opportunity for your business to thrive.
Bet on a contrarian truth
Ask yourself, “What important truth do very few people agree with you on?” Bet on the things you believed to be true, while everyone thinks the opposite.
Steve Jobs introduced iPhone, a mobile internet phone without physical keyboard in 2007. Smartphones combine the functionality of cell phone, mobile internet device and iPod music player. Smartphones are invented to reduce cumbersome keyboard and maximise viewing screen. The phone screen turns into a virtual keyboard whenever the user wishes.
Uber replaces taxi, by exchanging the role of taxi driver with anyone who could drive a car, to pick up a passenger. The truth is people are unwiling to stay in a stranger’s car. Uber converted this to the convenience of hopping on a car called with an app.
Airbnb replaces hotel, by exchanging hotels with homestay. The truth is that people are unwilling to stay in stranger’s house. Airbnb mediates the renting process by letting landlords rent out a room in the house to a stranger.
Startups dominate small market first
Amazon started off selling books on the internet, which is a niche market. Its vision is to become an “everything store” that even sells fresh fruits and vegetables and deliver them to your doorstep. Amazon is now transforming into an internet retail store.
It is short-sighted to dominate the 1% of the billion dollar market. It is far-sighted to aim for domination of 80% of the million dollar market. Aim for big share of a small market. Use pareto principle to find out the 20% that controls the 80%. Vilfredo Pareto discovered that 80% of the land in Italy were owned by 20% of people.
Early mistakes can be costly. Blunders and errors in choosing co-founders and employees can be difficult to correct. Thiel only invests in small, early-stage, emerging startups with high growth potential, where the founders already knew each other before pitching venture capitals. Investors earn profit from exponential growth in early-stage companies.
0 to 1
Dream big. Do not look for incremental 1 to n horizontal progress, look for 0 to 1 vertical progress. If a business won’t be around 10 years from now, then it is not worth pursuing. Short-sighted profit earning cannot withstand the test of time.
Avoid disruption and competition with existing market. Microsoft and Google were battling each other by competing products until Apple came along. Apple has 500 billion dollars of market capitalization, while only 467 billion dollars for Google and Microsoft. Competition is distracting and destructive at worst. Form alliance with other companies instead. Paypal worked with Visa.
Think of value creation and addition to form a new market. Instead of fighting to be the first, be the last one to reap the benefits of a mature ecosystem, like China’s entrance to the world economy. If everything else does not change for a thousand years, things will be exactly the same for another thousand years. If everything changes drastically overnight, then the future is now.
Choose the right group of people who share your vision and culture. No one can see the future because it has yet to be created. The future will undeniably be different from now, yet rooted in today’s world. Same for today’s world rooted in the advancements of the past.
Bostrom’s scenario for the future of humanity
- Recurrent collapse
History could be a never-ending loop of birth, growth and collapse. Only until recently people boldly postulate: we might escape misfortune by maintaining what we are doing now.
A plateau would signal trouble because it would not sustain a growing and consuming population in the future with finite resources that we have now.
Indefinite pessmism: Europe from 1970s to today. Eurozone is in crisis. No one is in charge. No one is sure when the crash will happen. Everyone enjoys life and take vacations while one can.
Definite pessimism: China’s economic growth happens all too slow. Rich people place their money outside. Poor people prepare for the worst as current economic growth is not sustainable.
Definite optimism: Western countries before 1970s. Huge plans were executed. Empire State building was erected. Panama Canal was built. Appollo program was launched.
Indefinite optimism: United States at present. Finance outshined engineering. Baby boomers (1946 to 1964) are used to entitlement.
Seize the unique opportunities we have to do new things. Think for yourself. Nothing in today should be taken for granted. We can build a future for ourselves if we work to create it today.