• Every moment in business happens once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.
• The act of creation is singular, as in the moment of creation, and the result is something fresh and strange.
• Humans are distinguished from other species by our ability to work miracles. We call these miracles technology.
• The paradox of teaching entrepreneurship: such a formula doesn’t exist; because every innovation is new and unique.
• Single most powerful pattern in successful people: they find value in expected places by thinking about business from first principles instead of formulas.

The Challenge of the Future

What important truth do very few people agree with you on?

• Brilliant thinking is rare, but courage is in even short supply than genius.
• 0 to 1 vs 1 to n
  • 1 to n: Horizontal progress, easy to imagine because we already know what it looks like, Globalization
  • 0 to 1: Vertical progress, harder to imagine because it requires doing something nobody else has ever done, Technology
• Startups, positively defined, is the largest group of people you can convince of a plan to build a different future.

Party like it’s 1999

Madness is rare in individuals — but in groups, parties nations, and ages it is the rule — Nietzsche.

• If you can identify a delusional popular belief, you can find what lies hidden behind it; the contrarian truth.
• Lessons learnt by entrepreneurs from dot-com crash:
  • Make incremental advances
  • Stay lean and flexible: “iterate”, treat entrepreneurship as as agnostic experimentation
  • Improve on the competition
  • Focus on product, not sales
• The opposite of these lessons are probably more correct:
  • Its better to risk boldness for triviality
  • A bad plan is better than no plan
  • Competitive markets destroy profits
  • Sales matters just as much as the product
• Before you start a business, always ask the question: how much of what you know about business is shaped by mistaken reactions to past mistakes?

• The business version of our contrarian question: what valuable company is nobody building?
• So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Under perfect competition, in the long run no company makes an economic profit.
• Capitalism and competition are opposites. Capitalism is premised on the accumulation of profits, but under perfect competition all profits get competed away.
• Lesson: If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
• Monopoly Lies: Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly — usually by exaggerating the power of their (nonexistent) competition.
• Competition Lies: Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation to describe your market extremely narrowly so you dominate it by definition.
• Creative monopolist: give customers more choice by adding entirely new categories of abundance to the world. They aren’t just good for society; they’re powerful engines for making it better.
• Monopolies drive progress because the promise of years or even decades of monopoly profit provides a powerful incentive to innovate.

All happy families are alike; each unhappy family is unhappy in its own way. 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.

• We preach competition, internalize its necessity, and enact its commandments; and as a result, we trap ourselves within it — even though the more we compete, the less we gain.
• If you can’t beat a rival, it may be better to merge. Example: PayPal and Elon Musk’s X.com. There is no middle ground: either don’t throw any punches or strike hard and end it quickly.

If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.

• A great business is defined by its ability to generate cash flow in the future, not just in the present. Value of a business today = sum of all money it will make in the future.
• Technology companies often lose money in the first few years: it takes time to build valuable things, and that means delayed revenue.
• If you focus on near-term growth above all else, you miss the important question: will this business still be around a decade from now?
• Characteristics of a Monopoly:
  • Proprietary Technology: Rule of thumb — proprietary technology must be at least 10 times better than its closest substitute in some important dimension.
  • Network Effects: Successful network companies always start with a small market.
  • Economies of Scale: A business should get stronger as it gets bigger since the fixed cost of creating a product (engineering, management, office space) can be spread out over greater quantities of sales. Software startups enjoy dramatic economies of scale because of the marginal cost of producing another copy of product ~ 0.
  • Branding: Creating a strong brand is a powerful way to claim a monopoly. No technology company can be build on brand alone. Branding follows product.
• Building a Monopoly:
  • Start Small and Monopolize: It’s easier to dominate a small market. If you think your initial market might be too big, it most certainly is. Perfect target market: small group of people concentrated together and served by few or no competitors.
  • Scaling Up: Start small and then scale up. Amazon — vision: dominate online retail, started with books
  • Don’t Disrupt: If you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create.

To succeed, you must study the endgame before everything else. — Capablanca

You are not a Lottery Ticket

Victory awaits him who has everything in order — luck, people call it. — Amundsen

• Process trumps substance: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options.
• Four class of people:
  1. Indefinite Pessimist: Present Europe
  2. Definite Pessimist: Present China
  3. Definite Optimism: US 1950-60
  4. Indefinite Optimism: Present US
• To a definite optimist, the future will be better than the present if he plans and works to make it better. Only in a definite future is money means to an end, not the end itself.
• Our Indefinitely Optimistic World:
  1. Indefinite Finance
  2. Indefinite Politics
  3. Indefinite Philosophy
  4. Indefinite Life
• Leanness is methodology, not a goal. Making small changes to things that already exist might lead you to a local maximum, but it won’t help you find the global maximum.
• Why should you expect you own business to succeed without a plan to make it happen? Darwinism maybe a fine theory in other contexts, but in startups, intelligent design wins.
• Forget “minimum viable product” — ever since Jobs started, he saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.

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 the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough.

A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins with rejecting the unjust tyranny of Chance. You are not a lottery ticket.

• Power Law (80-20 Rule / Pareto Principle): 20% of the effort produces 80% of the result. We don’t live in a normal world; we live under a power law.
• Power Law in VC: A small handful of companies radically outperform all others. If you focus on diversification instead of single minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place.
• The biggest secret in VC is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
• Horowitz invested $250k in Instagram and got a return of 312x in just two years. But since his fund is $1.5 billion in size, he will have to find 19 Instagrams just to break even.
• Every single company in a good VC fund must have the potential to succeed at the vast scale.
• Importance of VC: Total VC investment accounts for <0.2% of GDP, but creates 11% private jobs and the annual revenue is 21% of the GDP.
• Life is not a portfolio: not for a startup founder, and not for any individual.
• If anything, too many people are starting their own companies today. People who understand the power law wo; hesitate more when it comes to founding a new venture: they know how tremendously successful they could become by joining the very best company while it’s growing fast.
• Power law means that differences between companies will dwarf the differences in roles inside companies.

• If there are many secrets left in the world, there are probably many world-changing companies yet to be started.
• Four social trends have conspired to root out belief in secrets:
  • Incrementalism: e.g. academics chase large number of trivial publications rather than new frontiers.
  • Risk aversion
  • Complacency
  • Flatness: “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 dissuades people from even starting to look for secrets.
• If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth. The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers.
• Types of secrets:
  • Secrets of nature: study some undiscovered aspect of physical world
  • Secrets about people: things people don’t know about themselves or things they hide because they don’t want others to know
• Are there any fields that matter but haven’t been standardized or institutionalized? Example: Nutrition matters for everybody, but you can’t major in it at Harvard. Most top scientists go into other fields. We know more about the physics of faraway stars than we know about human nutrition.
• Who do you tell? There’s always a golden mean between telling nobody and telling everybody — that’s a company. Every great business is built around a secret that’s hidden from the outside.

Foundations

A startup messed up at its foundation cannot be fixed. — Thiel’s Law

• Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much, Founders should share a prehistory before they start a company together — otherwise they’re just rolling dice.
• To avoid likely sources of misalignment, its important to distinguish three concepts:
  • Ownership: who legally owns a company’s equity?
  • Possession: who actually runs the company on a day-to-day basis?
  • Control: who formally governs the company’s affairs?
• In a board room, less is more. Every single member of board matters. A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
• Everyone you involve in your company should be involved full-time.
• Single clearest pattern: A company does better the less it pays the CEO.
• High cash compensation teaches workers to claim value as it already exists instead of investing their time to create new value in future. A cash bonus is slightly better than high salary — at least its contingent on a job well done.
• Startups don’t need high salary — they can offer part ownership of the company itself.
• Tradeoff: Giving equal shares — arbitrary and unfair from the start since people have different talent and responsibilities, granting different amounts — cause resentment. Best to keep it a secret.
• Equity is a powerful tool precisely because of its limitations. It can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.
• Founding moment: lasts as long as company is creating new things — can be extended indefinitely.

• If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well — even in purely financial terms.
• Recruiting is core competency for any company. It should never be outsourced.
• Question to ask: Why should someone join your company as its 20th engineer when she could go work at Google for more money and prestige? Valuable stock, smart people, or pressing problem — most common answers.
• The only good answers are specific to your company, so you won’t find them in this book. You have to explain: not why it’s important in general, but why you’re doing something important no one else is going to get done.
• Explain why your company is unique match for him personally — don’t fight the perk war, cover the basics and promise what no one else can: the opportunity to do irreplaceable work on a unique problem alongside great people.
• Everyone at your company should be different in the same way — a tribe of like-minded people fiercely devoted to the company’s mission.
• One the inside, every individual should be sharply distinguished by her work.
• Cults: Cultures of total dedication that look crazy from outside. Best startups maybe considered slightly less extreme than a cult. Better be a cult than a mafia.

• Engineers are biased towards building cool stuff rather than selling it. But customers will not come just because you build it. You have to make that happen, it’s harder than it looks.
• Advertisement doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later. Anyone who can’t acknowledge its likely effect on himself is doubly deceived.
• If anything, 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.
• The most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.

Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.

• Two metrics for effective distribution: Customer Lifetime Value (CLV) > Customer Acquisition Cost (CAC)
• Complex sales: If the average order price is huge (in millions, like Palantir), the customers want to talk to the CEO not the VP of Sales.
• Advertising: can work for startups, maybe uneconomical, tough to compete with bigger companies with larger budgets.
• Viral marketing: if its core functionality encourages users to invite their friends to become users too. Can invite paid referrals as well.’
• Distribution also follows power law. Poor sales rather than bad product is most common cause of failure. If you can get one distribution channel to work, you have a great business. If you try for several and nail one, you’re finished.
• Selling your company to the media is a necessary part of selling it to everyone else. Never assume that people will admire your company without a public relations strategy.

Everyone has a product to sell — no matter whether you’re an employee, a founder, or an investor. It’s true even if your company consists of just you and your computer. Look around. If you don’t see any sales-people, you’re the salesman.

• Everyone of today’s smartphones has thousands of times more processing power than computers that guided astronauts to the moon.
• Computers are complements for humans, not substitutes. Computers excel at data processing but they struggle to make basic judgements that would be simple for any human.
• Computers can find patterns that elude humans, but they don’t know how to compare patterns from different sources or how to interpret complex behaviors. Actionable insights can only come from human analysts.

• Questionnaire (with an amazing case study on cleantech startups vs Tesla):
  • Engineering Question: Can you create breakthrough technology instead of incremental improvements?
  • Timing Question: Is now right time to start your particular business?
  • Monopoly Question: Are you starting with a big share of a small market?
  • People Question: Do you have the right team?
  • Distribution Question: Do you have a way to not just create but deliver your product?
  • Durability Question: Will your market position be defensible 10 and 20 years into the future?
  • Secret Question: Have you identified a unique opportunity that others don’t see?
• No sector will ever be so important that merely participating in it will be enough to build a great company.
• Could successful energy startups be founded after the cleantech crash just after Web 2.0 startups successfully launched amid the debris of the dot-com?

• The normal distribution of traits is a bell-shaped curve with end being:
  • weak/nerd, idiot, savant, disagreeable, outside, poor, villain, infamous
  • strong/athlete, polymath, charismatic, insider, rich, hero, famous
• While most people fall in this bell curve, successful founders instead form a reverse bell curve where most belong to either of these categories.
• Every king was a living god, and every god a murdered king. Perhaps every modern king is just a scapegoat who has managed to delay his own execution.
• We should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.

The lesson for founders is that individual prominence and adulation can never be enjoyed except on the condition that it maybe exchanged for individual notoriety and demonization at any moment — so be careful.

• The single greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.

• Four possibilities:
  • Recurrent collapse
  • Plateau
  • Extinction
  • Takeoff
• Our task today is to find singular ways to create the new things that will make the future not just different, but better — to go from 0 to 1. The essential first step is to think for yourself. Only by seeing our world anew, as fresh and strange as it was to the ancients who saw it first, can we both re-create it and preserve it for the future.