Doing what we already know, how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. The act of creation is singular, as is 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. Technology is miraculous because it allows us to do more with less,
The Challenge of the Future
“What important truth do very few people agree with you on?”
The knowledge that everyone is taught in school is by definition agreed upon.
Progress can take one of two forms. Horizontal or extensive progress means copying things that work — going from 1 to n. Vertical or intensive progress means doing new things — going from 0 to 1. At the macro level, the single word for horizontal progress is globalization. The single word for vertical, 0 to 1 progress is technology. Properly understood, any new and better way of doing things is technology. Most people think the future of the world will be defined by globalization, but the truth is that technology matters more. In a world of scarce resources, globalization without new technology is unsustainable.
The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury.
From the Founding Fathers in politics to the Royal Society in science to Fairchild Semiconductor’s “traitorous eight” in business, small groups of people bound together by a sense of mission have changed the world for the better. A startup is the largest group of people you can convince of a plan to build a different future.
Party Like It’s 1999
PayPal had a suitably grand mission. We wanted to create a new internet currency to replace the U.S.dollar.
Since the ’90s migration “from bricks to clicks” didn’t work as hoped, investors went back to bricks (housing) and BRICs (globalization). The result was another bubble, this time in real estate. Four big lessons from the dot – com crash that still guide business thinking today:
- Make incremental advances
- Stay lean and flexible
- Improve on the competition
- Focus on product, not sales
And yet the opposite principles are probably more correct:
- It is better to risk boldness than triviality
- A bad plan is better than no plan
- Competitive markets destroy profits
- Sales matters just as much as product
All Happy Companies Are Different
What valuable company is nobody building? Creating value is not enough — you also need to capture some of the value you create. Economists use two simplified models: perfect competition and monopoly. 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 capital, but under perfect competition all profits get competed away.
Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets. Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets. In business, money is either an important thing or it is everything. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Monopolies drive progress because the promise of years or even decades of monopoly profits provide a powerful incentive to innovate.
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.
The Ideology of Competition
Why do people compete with each other? Marx and Shakespeare provide two models for understanding almost every kind of conflict. According to Marx, people fight because they are different. To Shakespeare, by contrast, all combatants look more or less alike. In the world of business, at least, Shakespeare proves the superior guide.
Competition can make people hallucinate opportunities where none exist.
There is no middle ground: either don’t throw any punches or strike hard and end it quickly.
Last Mover Advantage
The value of a business today is the sum of all the money it will make in the future. You also have to discount those future cash flows to their present worth.
For a company to be valuable it must grow and endure, but many entrepreneurs focus only on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.
Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale and branding. Proprietary technology must be at least 10 times better than its closest substitute. The clearest way to make a 10x improvement is to invent something completely new.
Network effects businesses must start with especially small markets. A good startup should have the potential for great scale built into its first design. No technology company can be built on branding alone.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors. Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.
Disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new.
It’s much better to be the last mover. That is, to make the last great development in a specific market and enjoy years or even decades of monopoly profits.
You Are Not a Lottery Ticket
Instead of pursuing many-sided mediocrity and calling it “well-roundedness” a definite person determines the one best thing to do and then does it.
Europeans just react to events as they happened and hope things don’t get worse.
To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans.
Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth. Only in a definite future is money a means to an end, not the end itself.
To increase discretionary spending, we’d need definite plans to solve specific problems. But according to the indefinite logic of entitlement spending, we can make things better just by sending out more checks.
Today our society is permeated by the twin ideas that death is both inevitable and random.
Eroom’s law—that’s Moore’s law backward — observes that the number of new drugs approved per billion dollars spent on R & D has halved every nine years since 1950.
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?
Leanness is a 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.
A business with a good definite plan will always be underrated in a world where people see the future as random.
Follow the Money
We don’t live in a normal world; we live under a power law.
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.
Two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. Because rule number one is so restrictive, there can’t be any other rules. Every single company in a good venture portfolio must have the potential to succeed at vast scale.
Everybody who passes through the American school system learns not to think in power law terms. It does matter what you do. You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
Secrets
You can achieve difficult things, but you can’t achieve the impossible.
Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable.
Along with the natural fact that physical frontiers have receded, four social trends have conspired to root out belief in secrets:
- First is incrementalism.
- Second is risk aversion.
- Third is complacency.
- Fourth is “flatness”.
The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers. Sometimes looking for natural secrets and looking for human secrets lead to the same truth. Consider the monopoly secret again: competition and capitalism are opposites.
The best place to look for secrets is where no one else is looking. Are there any fields that matter but haven’t been standardized and institutionalized? Nutrition matters for everybody, but you can’t major in it at Harvard. There’s always a golden mean between telling nobody and telling everybody — and that’s a company. The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside.
Foundations
EVERY GREAT COMPANY is unique, but there are a few things that every business must get right at the beginning. When you start something, the first and most crucial decision you make is whom to start it with. It’s not just founders who need to get along. Everyone in your company needs to work well together. It’s very hard to go from 0 to 1 without a team.
You need good people who get along, but you also need a structure to help keep everyone aligned for the long term.
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?
A typical startup allocates ownership among founders, employees and investors. The managers and employees who operate the company enjoy possession. And a board of directors, usually comprising founders and investors, exercises control. A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
A cash – poor executive, will focus on increasing the value of the company as a whole. Any kind of cash is more about the present than the future.
Startups don’t need to pay high salaries because they can 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.
The Mechanics of Mafia
“Company culture” doesn’t exist apart from the company itself: no company has a culture; every company is a culture.
We sold PayPal to eBay for $ 1.5 billion in 2002. Since then, Elon Musk has founded SpaceX and co-founded Tesla Motors; Reid Hoffman co-founded LinkedIn; Steve Chen, Chad Hurley and Jawed Karim together founded YouTube; Jeremy Stoppelman and Russel Simmons founded Yelp; David Sacks co-founded Yammer and I co-founded Palantir.
There are two general kinds of good answers: answers about your mission and answers about your team.
Job assignments aren’t just about the relationships between workers and tasks; they’re also about relationships between employees. Defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.
If You Build It, Will They Come?
EVEN THOUGH SALES is everywhere, most people underrate its importance. Silicon Valley underrates it more than most.
In Silicon Valley, nerds are skeptical of advertising, marketing and sales because they seem superficial and irrational.
Like acting, sales work 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.
The engineer’s grail is a product great enough that “it sells itself”.
Businesses with complex sales models succeed if they achieve 50% to 100% year-over-year growth over the course of a decade.
Marketing and advertising work for relatively low-priced products that have mass appeal but lack any method of viral distribution. A product is viral if its core functionality encourages users to invite their friends to become users too.
Most businesses get zero distribution channels to work: poor sales rather than bad product are the most common cause of failure. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.
Man and Machine
The stark differences between man and machine mean that gains from working with computers are much higher than gains from trade with other people.
When we design new computer technology to help solve problems, we get all the efficiency gains of a hyperspecialized trading partner without having to compete with it for resources.
America’s two biggest spy agencies take opposite approaches: The Central Intelligence Agency is run by spies who privilege humans. The National Security Agency is run by generals who prioritize computers.
Recruiting is part detective work and part sales: you have to scrutinize applicants’ history, assess their motives and compatibility and persuade the most promising ones to join you. Effectively replacing all those functions with a computer would be impossible. Instead, LinkedIn set out to transform how recruiters did their jobs. If LinkedIn had tried to simply replace recruiters with technology, they wouldn’t have a business today.
Technology is supposed to increase our mastery over nature and reduce the role of chance in our lives.
Seeing Green
At the start of the 21st century, everyone agreed that the next big thing was clean technology.
People got busy: entrepreneurs started thousands of cleantech companies and investors poured more than $50 billion into them. So began the quest to cleanse the world. It didn’t work. Instead of a healthier planet, we got a massive cleantech bubble.
Most cleantech companies crashed because they neglected one or more of the seven questions that every business must answer:
- The Engineering Question: Can you create breakthrough technology instead of incremental improvements?
- The Timing Question: Is now the right time to start your particular business?
- The Monopoly Question: Are you starting with a big share of a small market?
- The People Question: Do you have the right team?
- The Distribution Question: Do you have a way to not just create but deliver your product?
- The Durability Question: Will your market position be defensible 10 and 20 years into the future?
- The Secret Question: Have you identified a unique opportunity that others don’t see?
Social entrepreneurs aim to combine the best of both worlds and “do well by doing good”. Usually, they end up doing neither.
Cleantech gave people a way to be optimistic about the future of energy. No sector will ever be so important that merely participating in it will be enough to build a great company. The challenge for the entrepreneurs who will create Energy 2.0 is to think small.
The Founder’s Paradox
Extreme founder figures are not new in human affairs. Classical mythology is full of them.
These are the roots of monarchy: 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. Celebrities are supposedly “American royalty”.
The lesson for business is that we need founders. If anything, we should be more tolerant of founders who seem strange or extreme; we need unusual individuals to lead companies beyond mere incrementalism.
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.
Stagnation or Singularity?
If we define the future as a time that looks different from the present, then most people aren’t expecting any future at all; instead, they expect coming decades to bring more globalization, convergence and sameness.
Without new technology to relieve competitive pressures, stagnation is likely to erupt into conflict. In case of conflict on a global scale, stagnation collapses into extinction.
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.
