Zero to One: Notes on Startups, or How to Build the Future

Many people believe business success is largely a matter of luck. If so, then there’s little point to coming up with new ideas, working hard to realize them, and making and executing plans. Thiel attributes this to what he calls indefinite optimism. People foresee an indefinite future, so they do lots of different things and don’t specialize or develop any big strengths. A “definite person,” on the other hand, “determines the one best thing to do and then does it. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one” (60-61).

Thiel claims that people can be assessed based on where they land on two scales: definite/indefinite and optimistic/pessimistic. The first type is the “indefinite pessimist,” who thinks the future is bleak but has no motivation or ideas about how to improve the world. The second type is the “definite pessimist,” who foresees a dark future and prepares for it. Thiel uses China as an example: Its decades of fast growth make it seem optimistic, but the huge country is driven by fear of falling behind—and by the historical memory of famine—so it copies the West’s industrial techniques and builds relentlessly, preparing for the worst.

The third type is the “definite optimist,” who believes the future will be better with effort. Thiel cites the continuous growth of science, engineering, and living standards beginning in the 1500s for fostering this attitude in Western countries. Americans, famously optimistic, built up their country relentlessly during the 1900s and even ventured into space. That spirit of innovation has faded in the US since the 1960s. Today, America is filled with “indefinite optimists”—the fourth type­— who expect an effortlessly bright future. Technology keeps advancing no matter what they do, but don’t know how it happens and make no plans to bring about change. Instead, they upgrade or rearrange old things to get more out of them. The wealthiest automatically get richer while others stagnate. Success seems to come out of nowhere and people think it’s caused by luck. Money becomes the goal instead of the means to a larger end.

Thiel traces this indefinite optimism beyond the business world. In politics, big plans give way as politicians instead tailor themselves to the latest public opinion polls. The government’s biggest jobs no longer involve interstate highway construction or voyages to the moon, but handing out entitlements. If a problem arises, bureaucrats simply send out more money. Even philosophy became indefinite. Since the 1970s, thinkers on both left and right agree that a better future is on the way, but they fail to envision it concretely. Instead, they argue about process and ignore goals. Another example given is healthcare; ever since Alexander Fleming accidentally discovered penicillin in 1928, drug companies have over-relied on chance to make progress. Today, pharmaceutical computers search through endless random molecular combinations, hoping for one that might prove medically useful. Thiel claims that since 1950, per billion dollars of research, drug discoveries have dropped by half every nine years.

A diagram on page 75 shows the relationship between types of belief and financial practices. It shows that, regardless of their optimism or pessimism, people with definite beliefs invest more, while those who have indefinite beliefs invest less. Savings, meanwhile, is low for optimistic people and high for pessimistic people. Indefinite optimism is the one combination where both savings and investment are low.

The problem, then, with indefinite optimism is how it can succeed at all: “how can the future get better if no one plans for it?” (75) Thiel cautions against applying Darwinian ideas to society, that we will simply evolve through natural selection and that firms that are lean and adaptive will survive. Such thinking expresses methods, not goals. It might lead to progressively more efficient products, but not to new ones.

Thiel provides a few last examples of success created by definite optimists. Steve Jobs launched the iPod in 2001 and critics thought it was cute but useless. The iPod, though, was the first in a series of devices he was working on: His long-term plans reaped benefits, and Apple became one of the most valuable companies in the world. When Yahoo! offered $1 billion for Facebook in 2006, CEO Mark Zuckerberg turned them down flat: He had big plans for his company. Thiel claims that founders who sell their companies do so because they’ve run out of ideas, but that startups are full of potential. It’s hard to change people’s attitudes but a startup company can influence the world through its innovation.

A small portion of businesses collect a large portion of the profits. This is an example of a power law, which describes how small changes in one thing can create big changes in another. One type of power law is the Pareto principle, also called the 80-20 rule, which states that roughly 80% of the results come from 20% of the inputs. This translates to the startup world as well, where companies are funded by venture capitalists. Inexperienced investors expect that some companies will lose, some break even, and some make money, but in fact most startups fail, and the few that succeed usually take years to earn profits. Often a single company in a group of startups will make more money than all the others combined.

Thiel shares his secret for succeeding in venture capital, which is to focus only on companies that have a chance to succeed spectacularly and give those startups as much money as possible. This is hard to do and since it can take years to pay off, it requires that the investor have a good deal of money to begin with. If all goes well, though, these new firms can be worth a fortune in the end.

None of this looks like standard investing, and it can confuse fund backers. Nonetheless, they can generate profits just as well as traditional funding models. Venture capital funds support fewer than 1% of all new companies, yet they provide returns equal to more than 20% of all goods and services produced in the US and generate 11% of all private-sector employment. The 12 largest tech firms all started with venture capital funding and now “are worth more than $2 trillion, more than all other tech companies combined” (89).

Thiel posits that everyone is an investor: They invest time and energy in their careers. It’s not possible to run a dozen companies or have a dozen careers; instead, people need to specialize and focus on what they believe gives them the biggest chance for success. Every aspect of a startup—its best market, best distribution strategy, and best use of the founder’s time—also follows a power law and must be considered carefully since every choice can have a big impact.

It’s important to know the conventional truths, like the Pythagorean theorem in math, but Thiel asserts it’s even more important to discover truths that no one else has noticed or figured out. These “secrets” can make all the difference, especially in business, since considering a secret can answer the question, “what valuable company is nobody building?” (93) Such answers are hard to find, but it’s not impossible so long as there are still secrets to unearth about reality.

A diagram on page 93 shows a horizontal line with three circles on it. The circle on the left, titled “conventions” for standard learning, is marked “easy.” The circle on the right, titled “mysteries” for truths about the universe that we may never learn, is marked “impossible.” The circle in the middle is titled “secrets,” and it’s marked “hard.” This is the circle to focus on in one’s thinking and learning.

Today, many believe there’s nothing new to be discovered. Thiel cites the example of Ted Kaczynski, the infamous Unabomber, wrote a manifesto in which he asserted that all remaining problems left to solve are either easy or impossible, and that his bombing campaign was meant to destroy modern civilization so that people could start over again solving challenging problems. While an extreme example, Thiel asserts that this view is shared by many who seem to have given up on having creative ambitions. He finds this idea ridiculous: “If everything worth doing has already been done, you may as well feign an allergy to achievement and become a barista” (95).

Just as he connected our valorization of competition to childhood, Thiel believes that the idea the world is known is one that’s instilled in us by our institutions. We fear being wrong and don’t take big risks; we become complacent and see society as socially flat because most questions are solved and things work just fine as they are. If all important things are known, then all markets should be perfectly efficient, and all injustices rooted out, explained, and overcome. Yet irrational investment bubbles keep happening and injustices abound.

Thiel claims that there are still secrets to uncover, “but they will yield only to relentless searchers” (100). Some of the greatest discoveries yet lie ahead: cures for cancer and aging, new forms of energy, distant space voyages. Thiel ties this principle to successful startups: Airbnb saw empty rooms in houses that could be rented; Uber and Lyft did the same for idle cars; Facebook’s simple product changed social interactions. These ideas are obvious once they’re seen, so there must be many more such straightforward ideas waiting to be discovered.

Secrets are hidden inside the natural world and in people’s thoughts. Knowing what people aren’t free to say is a leg up. Looking for secrets where others don’t, especially in fields that could flourish with some effort but don’t receive much attention, creates opportunities for the taking. The world often rejects people who propose completely new ways of doing things. A company, though, can hold the secret, develop it, and reveal it as a useful product.

Thiel delves into practical advice in this chapter, starting with the principle that startups need to get certain fundamentals right or else mistakes will get baked in.

This starts with people. If the founding partners don’t get along, the firm is doomed. Committing to a business partner too quickly, before learning how you work together, is a terrible idea. Early on, Thiel invested in a business whose founder chose a partner too quickly. Their goals soon clashed, the business folded, and Thiel lost his investment.

Staff is just as important as the founders. New companies must hire people who get along and whose goals are aligned. To ensure this, a new firm needs rules that define clearly each early person’s role and the amount of control they have. Early hires usually get a piece of the ownership, which helps to solidify their motives. Thiel cites a typical Department of Motor Vehicles (DMV) as an example of a badly run organization where decision-making control is misaligned. In theory, a DMV is owned by the people; in practice, the bureaucrats who work there make the decisions, and even state legislatures and governors can barely budge them.

CEOs of big corporations also can become misaligned, especially when their compensation packages make them richer if they cut corners to improve quarterly results. In startups, investors sometimes get impatient and want quick results, while founders want to stay the course for a bigger result down the road. Small oversight boards with three members, carefully chosen, are best; huge boards, as at some nonprofits, become ineffective. Where possible, it’s best to avoid hiring consultants or part-time workers. They don’t have ownership in the company and can take a short-term perspective that doesn’t support the team as a whole. Likewise, startup CEOs paid more than $150,000 become more interested in preserving that salary than growing the company. A low salary is future-oriented and inspires the rest of the staff by keeping the playing field more equal.

Giving participants part ownership incentivizes them to work toward the startup’s future goals. The amount each receives, though, can spark resentments, especially if early hires make a fortune while later hires don’t. Thiel asserts that these decisions should be kept private to keep the company culture amicable. Speaking of culture, setting an inventive, creative tone at the outset can pay dividends years later if the company still sees itself “being born” on a daily basis. In that way, “you can steer its distant future toward the creation of new things instead of the stewardship of inherited success” (114). 

In 2002, eBay bought PayPal for $1.5 billion. Thiel’s team members, today known as the “PayPal Mafia,” went on to found SpaceX, Tesla Motors, LinkedIn, YouTube, Yelp, Yammer, and Palantir. Each is worth more than $1 billion. Many companies’ workers are thinly connected and largely in it for the money, but the PayPal group worked well together because they liked each other and wanted to achieve the PayPal vision.

Thiel uses PayPal to show that attracting talented workers who function well together is critical to success. Those who are tempted by special perks are the wrong fit. Startup workers should share the same values proudly. At PayPal, they all were sci-fi nerds who envisioned a digital currency free from government control. They were “equally obsessed” with this idea, and Thiel asserts that “everyone at your company should be different in the same way” (119). To keep the peace, each worker must be assigned a single job. This keeps them from quarreling over ill-defined responsibilities. Internal strife can kill a company as easily as external competition.

Thiel makes a controversial comparison to cults, positing that companies with cult-like cultures have a big advantage when it comes to dedication. Unlike standard cults, who are “fanatically wrong” about something important, startup cults can be “fanatically right” about their own mission.

Another practical thing to consider is sales and marketing. Especially in Silicon Valley, engineers believe cool inventions will sell themselves, and that sales people are a drag on that process. In fact, sales efforts are vital, and Thiel says that “it’s harder than it looks” (124) to get a product out there.

Many people believe advertising doesn’t work on them, but ads aren’t about immediate sales; they’re about creating a positive impression that leads to sales later on. Thiel calls sales the subtle art of persuasion, and the best salespeople can shift clients’ attitudes without them noticing it. We think we’re immune precisely because the sales process is hidden.

An excellent marketing campaign can create a creative monopoly, but an excellent product without marketing cannot. This is not carte blanche to spend recklessly on marketing: Net profits must be greater than the cost of acquiring the customers. Higher-profit products usually require more marketing costs. Sales over $10 million are called complex sales; these require months or years of careful campaigning, personalized attention, and a lot of hand-holding. Usually, the CEO or founder does the selling in these cases.

Early sales will be small while clients get used to the new company. With lots of satisfied customers, the sales reps can move toward larger, more comprehensive sales packages. One of Thiel’s Founders Fund startups, ZocDoc, lists local doctors in a system that patients use to locate care and make medical appointments. Each physician pays $100 a month to be listed. Enrolling doctors requires a large sales force, but as ZocDoc brings in more doctors, it becomes more valuable, which speeds up the sales process. The goal is to change the way people do things; eventually, if ZocDoc signs up most of the doctors in the US, it’ll become a “fundamental utility” in America’s health care system.

If a company can get new customers to recommend it to their friends, the product can go viral. PayPal paid its early customers to join, then paid them again when they brought in another customer. This user base doubled every 10 days, and within months PayPal had hundreds of thousands of customers who paid small fees to transfer money. These fees added up to vastly more than the initial payments the company made to acquire their users. Then PayPal discovered the 20,000 merchants on eBay who made money transfers constantly, and their email product soon owned that niche section of the market.

Sales obeys power laws: One distribution channel may outsell all the others. A scattershot approach can fail and bring down the company; it’s better to investigate carefully each channel and find the one that works best for a particular product.

It's a myth that some companies are so good that they automatically sell themselves to potential employees and investors. That buzz, too, must be nurtured.