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

When interviewing potential new hires, Thiel asks them what they believe that almost no one else believes. For him, it’s a test of courage as well as the ability to think creatively. Most people simply answer by stating their view in a popular debate: a view already shared by many. The best answers instead see into the future.

Most progress is horizontal: It takes what’s been invented and copies it for everyone. Thiel calls this going “from 1 to n.” Vertical progress, though, brings in something new, going “from 0 to 1” (8). Producing another 100 typewriters is horizontal growth; developing a word processor is vertical growth. Thiel claims that vertical progress comes from technology, while horizontal progress comes from globalization. During the 1800s, both technology and globalization happened together; but this is not always the case. In the early-to-mid 20th century, technological advances were paramount, while from the 1970s to today, globalization has been the main source of economic growth.

Most people think the future will be more of the same, with the undeveloped world simply catching up. Thiel asserts that this is a dangerous assumption; if China and India modernize in the same way as the West, an “environmentally catastrophic” disaster will result. Globalization isn’t enough; new technology must lead the way. Inventions aren’t guaranteed, though, and we can’t assume that they’ll happen without concerted effort. This is because big corporations tend to stifle innovation in favor of safe bets, while lone inventors can’t scale up their discoveries. Thiel concludes that the best mechanism for advancing new technology is the startup: a firm with a dedicated group of people, large enough to get things done but small enough not to restrain new ideas.

The 1990s began with a recession, but the internet erupted in earnest in 1993, with the development of the first web browser. Netscape, Yahoo!, and Amazon got started and quickly rose in value. In the late ‘90s, several Asian countries and Russia suffered severe economic setbacks, and investors flocked instead to internet stocks. Despite these companies’ lack of profits, investors became overly exuberant, putting money into more and more sketchy business ideas in the hopes of winning big.

A graph on page 18 shows the steady rise of the NASDAQ stock market during the latter 1990s. At the bottom are, from left to right, the years 1995 through 1999; on the right is a vertical line showing the value of the NASDAQ, from 0 at the bottom to 5,000 at the top. A wobbly line begins on the left, at an elevation of about 1,000, and rises fairly steadily until, in late 1999, it starts to climb rapidly. This steep rise is the investment bubble at the end of the decade, when people recklessly invested in all types of tech companies. A graph on page 21 shows what happened afterward: The bubble burst and NASDAQ fell sharply, followed by a steady decline. By 2002, it settled at about 1,000, roughly where it was in 1995.

In 1999, just before the crash, Thiel’s company PayPal introduced a method of making payments through email but had trouble getting enough users. They paid people $10 to join and gave them another $10 whenever they referred a friend. This helped, but, anticipating that the dot-com boom wouldn’t last, they hurried to obtain funding from other sources. PayPal survived the crash, but investors decided that optimism was out and slow, incremental planning was in. Big ideas were discouraged. Cautious improvement of the competition’s products was the smart move, and development, not marketing, was what mattered.

Thiel rebels against this overcorrection and instead advocates for (1) boldness, (2) planning, (3) avoiding competition, and (4) vigorous marketing. His most important principle is independent thinking that doesn’t simply copy popular ideas, but instead questions the safe assumptions.

Big companies aren’t always good companies. US airlines generated $160 billion in 2012 but kept less than 1% as profit. Meanwhile, Google’s revenues that year were $50 billion and resulted in $21 billion in profit. In 2014, Google was worth three times as much as all the airlines put together. The airlines are in perfect competition with each other—they all sell the same product, and no one has any real advantage—but Google’s search product is unique, resulting in a profitable monopoly. Thiel uses this as a case study for his concept of creative monopoly, where Google’s singular status in its market is the ideal.

Traditionally, monopolies arise through bullying, cheating, or preferential treatment by governments. The book is concerned instead with “the kind of company that’s so good at what it does that no other firm can offer a close substitute” (25). According to Thiel, a creative monopoly earns its dominant place not by actively competing with other companies, but by outperforming them through sheer ingenuity.

Still, the term “monopoly” comes with stigma—and government regulation. Fearful of being penalized for their success, monopoly companies tend to underplay their position in the marketplace, claiming they face stiff competition. For example, Google calls itself a tech company whose business is a blend of multiple products, and that its business controls less than 1% of the worldwide ad market; in fact, Google’s main revenue stream flows from online ads, where they’re the dominant player.

Meanwhile, firms caught up in fierce, profit-reducing competition overplay their position and claim they’re unique. They emphasize the minor differences between them and their competitors and claim their product is an intersection of several worthwhile traits. Thiel cites airlines, restaurants, and even movie screenwriters, as examples of entities that battle against competitors who essentially offer the same products. He compares PayPal to the restaurants surrounding the company’s Mountain View, California office. PayPal’s small cadre of workers could choose to buy lunch from nearby restaurants offering a number of cuisines and price points. By contrast, PayPal was the only company in the world offering an email-based payments service. Because of its unique product, it was worth more than all those local restaurants combined.

Perhaps counterintuitively, more competition inspires ruthless behavior towards employees. Restaurant owners usually pay minimum wage and make their relatives help out in the kitchen; Google, with plenty of money, can afford to take good care of its workers and “take ethics seriously without jeopardizing its own existence” (32). The restaurant owners can only think about paying their bills. This point is taken up again in the next chapter, which questions the value of competition.

Creative monopolies based on new and better products are rewarded for bringing abundance to the market, rather than the idea of scarcity. Apple made a fortune on its smartphones because iPhones were the first of their kind and worked well, setting the standard for consumer satisfaction. Apple’s invention toppled a previous monopoly on computer operating systems controlled by Microsoft, which, in turn, had overturned IBM’s computer monopoly. Successful companies all are different, but they share one characteristic: They each develop a unique solution to problems that customers want solved.

Thiel mentions earlier in the book that he doesn’t believe the status-quo idea that competition is inherently good. According to Thiel, competition isn’t merely an inconvenient fact of the marketplace, it’s an ideology that’s drilled into us from childhood. Those who earn the best grades get promoted into the best schools, where they must compete against equally competent students for access to the best jobs.

Thiel highlights the value of deviating from traditional competition through a personal anecdote. His chosen career path required a clerkship with a US Supreme Court justice, but he wasn’t able to secure that position. The failure devastated him, but a friend pointed out to him years later that, had he won that conventional prize, there’d be no PayPal. “I probably would have spent my entire career taking depositions or drafting other people’s business deals instead of creating anything new” (38).

It’s popular among thinkers to assume that business is war. Thiel claims that Karl Marx believed we fight because we’re economically different, while Shakespeare held that, like the Montagues and Capulets of Romeo and Juliet, we fight because we’re the same. Thiel takes Shakespeare’s side, using Microsoft and Google as an example of firms focusing on their competitors while ignoring their own growth opportunities. Like the Montagues and Capulets, Microsoft and Google at first developed their own strengths, but they soon focused on each other and developed competing products: “Windows vs. Chrome OS, Bing vs. Google Search, Explorer vs. Chrome, Office vs. Docs, and Surface vs. Nexus” (39). While they fought, Apple overtook them both with its original products. Where once they were each worth more than Apple, Apple become worth more than both of them combined.

In 2010, Square unveiled a little device that, when connected to a smartphone, could accept credit card payments. Promptly, several more companies joined in—competing not on quality but on the shape of the little device. An illustration on page 40 shows four identical smartphones, each with a competing payment-acceptance device ready to be plugged in. All the devices are essentially identical—same plug, same means of operation—except for the variations in their shape. This example illustrates the lack of creativity that can arise through competition, where one would be hard pressed to call a simple change in shape an innovation, or even a real difference.

Thiel concedes that competition is not always avoidable, and sometimes a company does have to fight; when this is the case, it should “strike hard” and end the conflict. Leaders often quibble over small insults, though, which extend short battles into long wars of angry attrition. Thiel advises that this should be avoided at all costs.