Sundarrajk's Weblog

Archive for the ‘Peter Thiel’ Category

Zero to One: Notes on Startups, or How to Build the FutureZero to One: Notes on Startups, or How to Build the Future by Peter Thiel
My rating: 3 of 5 stars

The author is one of the cofounders of Paypal. Paypal was founded at the turn of the 20th century into the 21st century. It was one of the companies which was founded during the eCom boom era and has thrived. The book is about the lessons learnt by the author in running the startup. These are guidelines that needs to be followed by anybody who wishes to start and setup a new successful organization.The author states that one can form a new organization and try to do one of the following:
1. Copy and possibly improvise on what other successful organizations are doing
2. Create something completely new.
The first option is easy to execute as one does not need to think what to do. One will need to think how to incrementally do something better than what others are doing. This is an easy option although easy but it is not a recipe for sure success since one will be competing with many others doing the same thing. Unless one has something uniquely different in what is being offered success, if at all, is bound to be limited.
The second option is difficult, because one needs to first figure out what is it that one can do which the others have not thought of and one also needs to check if that is something that the others are going to need. This option, although difficult, if executed correctly is almost guaranteed to be a success.
The author clarifies the theme of the book. The second option will lead an organization to go from 0 – 1. The first option will possibly lead people from 1 to n, but that does not mean huge success.
The author also emphasizes that “Technology” will lead organizations from 0 to 1 whereas globalization will lead organizations from 1 to n.
If one needs to test if one has the capability of creating an organization which can go from 0 to 1, one needs to ask the question “Does one know something that is accepted only by a few and not by everybody”. Because if everybody things that is the right thing then there would be others who are already doing it.

The take away, according to the author, from the dot com boom-burst of the late nineties are:
1. Make incremental advances
2. Stay lean and flexible
3. Improve on the competition
4. Focus on Product, not sales

Following these principles will allow a company to succeed in going from 0 to 1.

The author cites the irony that to succeed in a capitalist market one needs to be monopolist without appearing to be one to be hugely successful. Google successful as it is highly monopolistic without being seen as one. It is stated that over a period of time the market reaches the state of “Perfect Competition” in which no organization has to give anything better than the others in the same business. The example quoted is that of the airlines. All airlines are more or less the same and hence their profit margin is extremely narrow, whereas Google is unique and hence its profit margin is much higher than of the large airlines.
It is opined that both the monopolistic companies and the companies in Perfect Competition lie. The monopolists try and create an image where it appears that they are not a monopoly. E.g. if one considers Google as an organization that provides Internet Search then it is monopolistic as it owns 68% of the search on the internet. When one looks at Google as an organization that earns through online advertizing then again based on how one compares Google can be proved to a monopoly or otherwise. In 2012 Google’s total revenue was around 47 billion. Of this close to 45 billion was from search and online advertisements. The overall online advertising market for the US about 37 billion. If one looks at it from this perspective then Google is a monopolist. The over all advertisement market in the US is about 150 billion. Now too Google looks like it is a monopolist. The total advertising market in the whole world is 495 billion dollars and now Google does not look like a monopolist. The other consumer electronics that Google manufactures accounts for about 2.35 billion dolllars turnover. This is only 0.24% of the total consumer electronics which is close to 964 billion dollars. From this perspective Google does not seem to be a monopolist. So depending on the perspective that is presented by the organization it can appear to be a monopoly or not.
The organizations in the competitive market try to convince themselves that the are unique by suitably comparing themselves only on parameters where they are unique. E.g. an Indian restaurant in Palo Alto serving only British food may appear to be a case of monopoly. But one also needs to consider this from a perspective of the overall market that exists for British food in the said market. The restaurant owner needs to understand that his audience has a variety of choices from a Mc Donald’s to a Thai, to an Indian to a Chinese restaurants. The number of people who are looking out for only British cuisine will be limited and this means that the restaurant cannot claim any monopoly in the area. They would only be deluding themselves if they do so.
The author also states that the monopolists will have a field day as long as they remain a monopoly, but sooner or later there will be competition as others start emulating the monopolist.
It is highlighted that our education system is a culprit in making us take the competitive path rather than the monopolist path. We are taught from childhood that one needs to compete to be better than others in the class and later better than others in the town then be better than others in the country. Soon this becomes ingrained in us and we end up competing with others throughout our life instead of building/doing something different which has no competition.
Here is an extract that really impressed me “Professors downplay the cutthroat culture of academia, but business managers never tire of comparing business to war. The MBA carry around copies of Clausewitz and Sun Tzu. War metaphors invade our everyday business language: we use headhunters to build up our sales force that will enable us to take a captive market and make a killing. But really its competition, no business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive”.
Some of the characteristics of a monopoly company are as under
1. Proprietary Technology
2. Network effects
3. Economies of Scale
4. Branding: This on its own is insufficient. One needs to have a real solid product/service to sell. Brand will only enhance it.
One needs to be in charge of one’s future to succeed one cannot depend on luck to succeed.
The author opines that it is only a very small percentage of startups that succeed. And as per the author most venture capitalists do not realize this and spread their fund thin across multiple startups instead of on a few that have potential to succeed and in the process they do not get very high returns. He also goes on to say that most Venture Capitalists fail to see this as this becomes obvious only over a long period of time, typically a decade or more. These people end up spending their time in monitoring companies that are performing poorly or have not got a good valuation in the early stages.
The author states that the secret to succeeding is to look out for secrets. The author quotes the example of how Facebook, Uber, Airbnb, all became a hit. In hindsight they might seem common sense, but then they were the only ones to do it.
For a company to succeed it must have strong foundations. The team should gel well and should complement each other. They should be full time on the job and not part time. Exceptions may exist for jobs that do not required full time dedication and are expensive, like a legal person may not be required all the time. Other key advice that the author gives is that a startup should not have a CEO who has to be paid a bomb. This will not encourage the CEO to drive the company in the right direction as she is getting her money. Only when the CEO is in a position where she has to ensure the right path for the organization, for her to get her remuneration will the CEO play a useful role in the growth of the company.
The founders of Paypal came be to known as the Paypal mafia because of the close relationship they maintained with each other and respect they had for each other even after they sold the company. The author justifies it saying that unless there is this kind of bonding between the founders the organization has very little chance of survival. The founder members should almost be followers of a common cult.
While it is required to have Sales and Marketing the author opines that having the right distribution mechanism, a mechanism that can cause the product to become viral is important in today’s world for success.
The author also talks about how all the companies that started up with a plan to grow based on Go Green principle have failed miserably as most of them did not have any unique idea. They all started with the standard alternate energy solutions and as a result they have not been successful.
The author ends the book with a chapter that outlines how most successful entrepreneurs have a weird streak to their personality. He opines that it is not that these personalities are born with this weird streak. They start off with a slightly different nature than the others and these get exaggerated as time progresses both due to external influence and due to internal concentration on these features.

A good read for people wishing to start their organization.

View all my reviews