Different kinds of progress
In this thought-provoking book, serial entrepreneur turned venture capitalist, Peter Thiel, details how startups can turn into a profitable monopoly. He begins by mentioning that founders must take a critical view on the present and imagine what the future may look like in the 22nd century. Progress fills up the gap between today and tomorrow. He adds that progress comes in 2 forms:
- Horizontal progress, also known as evolving from “1 to n” deals with replicating an idea and applying it in other countries. This is the role of globalization.
- Vertical progress, also called going from 0 to 1, involves creating something new out of nothing, so to speak. The iPhone is an example of vertical progress.
As established companies are well positioned to conduct “horizontal progress” by maximizing economies of scales and taking advantage of their global footprint, startups, with their fresh energy and willingness to take risks and innovate, should aim at “vertical progress.”
Creating a successful startup
But how to build a successful startup? Peter Thiel believes founders ought create monopolies, as they prove beneficial to entrepreneurs, investors and consumers as well. They usually provide superior products at a lower price point by harnessing multiple assets:
- First of all, they enjoy a technological advantage helping them manufacture products superior to competition by a factor of 10. This is sometimes referred to as the “10 x advantage.”
- Secondly, they enjoy network effects where any new client increases the value of their offering for all. Think of the telephone phone at the end of the 19th century and beginning of the 20th century. Every new telephone owner would increase the number of people that other telephone owners could call thereby increasing telephone communication possibilities.
- Plus economies of scale reduce production costs
- Finally, they take advantage of great branding.
In the end, monopolies set their own prices ensuring higher profits. For example, the highly competitive and non-monopolistic airline industry only takes 37 cents of profit for every airline passenger trip, while Google is turning a quarter of its revenue into profits.
So, how should startup founders turn their company into a profitable monopoly?
They should first look for narrow market segment which they can dominate. Then, they may expand to another narrow market segment with the intent of dominating it as well. Peter Thiel talks about Amazon’s go-to-market strategy. Jeff Bezos started out in the online book selling market segment and then expanded from there.
- Founders should also hire the right people to harness the team’s personal connections.
- Entrepreneurs should build the right culture
- Finally, sales and distribution is also critical and must be fine-tuned according to market needs
Finally, Peter Thiel talks about the clean tech bubble which burst in the late 00s.
7 principles to launching a promising business
Clean tech companies failed because they were unable to answer 7 crucial questions including
- The engineering question: does clean tech provide a technology breakthrough relative to established technologies? Unfortunately, that was not the case.
- The timing question: is it the right time to start the business? In other words, are solar panel technologies on the cusp of exponential advances? Unfortunately, that wasn’t the case. They were advancing slowly and linearly.
- The monopoly question: are clean tech companies able to build monopolies?
- The people question: can clean tech companies be managed by non-technical people?
- The distribution question: have they found the right way of getting to the final consumer?
- The durability question: would they be able to defend their positions in the next 10 to 20 years, in the face of Chinese competition?
- The secret question: do they have any possibility of leveraging secrets that no other companies can copy?
Clean tech companies failed to meet any of the above-mentioned conditions, much to the difference of Elon Musk’s Tesla.
To sum up
In his book, Zero to One, serial entrepreneur turned venture capitalist, Peter Thiel shows how founders must think critically of present times in order to be the architect of their future and develop a fresh offering, one that has never thought of before. Founders must seek to build a novel and original product rather than duplicate existing ideas and apply them to other geographies. In this respect, entrepreneurs should aim to go from 0 to 1.
To do this, Peter Thiel suggests that founders build a startup with the intent of creating a monopoly on a very narrow market segment before they expand to adjacent market segments. He also details seven critical questions entrepreneurs must address if they want to build a successful business much like Elon Musk Tesla.