Highlights
Chapter 5: 1. The Challenge of the Future
“What important truth do very few people agree with you on?”
Chapter 5: 1. The Challenge of the Future
Horizontal or extensive progress means copying things that work—going from 1 to n. Horizontal progress is easy to imagine because we already know what it looks like. Vertical or intensive progress means doing new things—going from 0 to 1
Chapter 5: 1. The Challenge of the Future
My own answer to the contrarian question is that most people think the future of the world will be defined by globalization, but the truth is that technology matters more. Without technological change, if China doubles its energy production over the next two decades, it will also double its air pollution. If every one of India’s hundreds of millions of households were to live the way Americans already do—using only today’s tools—the result would be environmentally catastrophic. Spreading old ways to create wealth around the world will result in devastation, not riches. In a world of scarce resources, globalization without new technology is unsustainable.
Chapter 5: 1. The Challenge of the Future
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.
Chapter 6: 2. Party Like It’s 1999
Conventional beliefs only ever come to appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a bubble. But the distortions caused by bubbles don’t disappear when they pop. The internet craze of the ’90s was the biggest bubble since the crash of 1929, and the lessons learned afterward define and distort almost all thinking about technology today. The first step to thinking clearly is to question what we think we know about the past.
Chapter 6: 2. Party Like It’s 1999
So the backdrop for the short-lived dot-com mania that started in September 1998 was a world in which nothing else seemed to be working. The Old Economy couldn’t handle the challenges of globalization. Something needed to work—and work in a big way—if the future was going to be better at all
Chapter 6: 2. Party Like It’s 1999
Paper millionaires would rack up thousand-dollar dinner bills and try to pay with shares of their startup’s stock—sometimes it even worked.
Chapter 6: 2. Party Like It’s 1999
One acquaintance told me how he had planned an IPO from his living room before he’d even incorporated his company—and he didn’t think that was weird
Chapter 6: 2. Party Like It’s 1999
We gave new customers $10 for joining, and we gave them $10 more every time they referred a friend. This got us hundreds of thousands of new customers and an exponential growth rate. Of course, this customer acquisition strategy was unsustainable on its own—when you pay people to be your customers, exponential growth means an exponentially growing cost structure. Crazy costs were typical at that time in the Valley. But we thought our huge costs were sane: given a large user base, PayPal had a clear path to profitability by taking a small fee on customers’ transactions.
Chapter 6: 2. Party Like It’s 1999
- Make incremental advances
Grand visions inflated the bubble, so they should not be indulged. Anyone who claims to be able to do something great is suspect, and anyone who wants to change the world should be more humble. Small, incremental steps are the only safe path forward. - Stay lean and flexible
All companies must be “lean,” which is code for “unplanned.” You should not know what your business will do; planning is arrogant and inflexible. Instead you should try things out, “iterate,” and treat entrepreneurship as agnostic experimentation. - Improve on the competition
Don’t try to create a new market prematurely. The only way to know you have a real business is to start with an already existing customer, so you should build your company by improving on recognizable products already offered by successful competitors. - Focus on product, not sales
If your product requires advertising or salespeople to sell it, it’s not good enough: technology is primarily about product development, not distribution. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth.
Chapter 6: 2. Party Like It’s 1999
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.
Chapter 7: 3. All Happy Companies Are Different
“Perfect competition” is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand.
Chapter 7: 3. All Happy Companies Are Different
Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized, and attacked. 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.
Chapter 7: 3. All Happy Companies Are Different
If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
Chapter 7: 3. All Happy Companies Are Different
Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets
Chapter 7: 3. All Happy Companies Are Different
Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets
Chapter 7: 3. All Happy Companies Are Different
Whatever your views on thermodynamics, it’s a powerful metaphor: in business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won’t matter to the world; some other undifferentiated competitor will always be ready to take your place.
Chapter 7: 3. All Happy Companies Are Different
Monopoly is the condition of every successful business.
Chapter 7: 3. All Happy Companies Are Different
Business is the opposite. 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.
Chapter 8: 4. The Ideology of Competition
In October 2010, a startup called Square released a small, white, square-shaped product that let anyone with an iPhone swipe and accept credit cards. It was the first good payment processing solution for mobile handsets. Imitators promptly sprang into action. A Canadian company called NetSecure launched its own card reader in a half-moon shape. Intuit brought a cylindrical reader to the geometric battle. In March 2012, eBay’s PayPal unit launched its own copycat card reader. It was shaped like a triangle—a clear jab at Square, as three sides are simpler than four. One gets the sense that this Shakespearean saga won’t end until the apes run out of shapes.
Chapter 8: 4. The Ideology of Competition
But in February 2000, Elon and I were more scared about the rapidly inflating tech bubble than we were about each other: a financial crash would ruin us both before we could finish our fight. So in early March we met on neutral ground—a café almost exactly equidistant to our offices—and negotiated a 50-50 merger. De-escalating the rivalry post-merger wasn’t easy, but as far as problems go, it was a good one to have. As a unified team, we were able to ride out the dot-com crash and then build a successful business.
Chapter 8: 4. The Ideology of Competition
true heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business. If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most
Chapter 9: 5. Last Mover Advantage
The answer is cash flow. This sounds bizarre at first, since the Times was profitable while Twitter wasn’t. But a great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspapers’ monopoly days are over.
Chapter 9: 5. Last Mover Advantage
If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.
Chapter 9: 5. Last Mover Advantage
You can also make a 10x improvement through superior integrated design. Before 2010, tablet computing was so poor that for all practical purposes the market didn’t even exist. “Microsoft Windows XP Tablet PC Edition” products first shipped in 2002, and Nokia released its own “Internet Tablet” in 2005, but they were a pain to use. Then Apple released the iPad. Design improvements are hard to measure, but it seems clear that Apple improved on anything that had come before by at least an order of magnitude: tablets went from unusable to useful.
Chapter 9: 5. Last Mover Advantage
we set our sights on eBay auctions, where we found our first success. In late 1999, eBay had a few thousand high-volume “PowerSellers,” and after only three months of dedicated effort, we were serving 25% of them. It was much easier to reach a few thousand people who really needed our product than to try to compete for the attention of millions of scattered individuals.
Chapter 9: 5. Last Mover Advantage
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
Chapter 10: 6. You Are Not a Lottery Ticket
Only in a definite future is money a means to an end, not the end itself.
Chapter 10: 6. You Are Not a Lottery Ticket
Biotech startups are an extreme example of indefinite thinking. Researchers experiment with things that just might work instead of refining definite theories about how the body’s systems operate.
Chapter 10: 6. You Are Not a Lottery Ticket
But indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?
Chapter 10: 6. You Are Not a Lottery Ticket
Darwin’s theory explains the origin of trilobites and dinosaurs, but can it be extended to domains that are far removed? Just as Newtonian physics can’t explain black holes or the Big Bang, it’s not clear that Darwinian biology should explain how to build a better society or how to create a new business out of nothing. Yet in recent years Darwinian (or pseudo-Darwinian) metaphors have become common in business. Journalists analogize literal survival in competitive ecosystems to corporate survival in competitive markets. Hence all the headlines like “Digital Darwinism,” “Dot-com Darwinism,” and “Survival of the Clickiest.”
Chapter 10: 6. You Are Not a Lottery Ticket
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.
Chapter 11: 7. Follow the Money
In 1906, economist Vilfredo Pareto discovered what became the “Pareto principle,” or the 80-20 rule, when he noticed that 20% of the people owned 80% of the land in Italy—a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the peas. This extraordinarily stark pattern, in which a small few radically outstrip all rivals, surrounds us everywhere in the natural and social world. The most destructive earthquakes are many times more powerful than all smaller earthquakes combined. The biggest cities dwarf all mere towns put together. And monopoly businesses capture more value than millions of undifferentiated competitors
Chapter 11: 7. Follow the Money
The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.
Chapter 11: 7. Follow the Money
This implies two very strange rules for VCs. First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.
Chapter 11: 7. Follow the Money
Every university believes in “excellence,” and hundred-page course catalogs arranged alphabetically according to arbitrary departments of knowledge seem designed to reassure you that “it doesn’t matter what you do, as long as you do it well.” That is completely false. 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.
Chapter 12: 8. Secrets
four social trends have conspired to root out belief in secrets. First is incrementalism.
Chapter 12: 8. Secrets
Second is risk aversion.
Chapter 12: 8. Secrets
Third is complacency.
Chapter 12: 8. Secrets
Fourth is “flatness.” As globalization advances, people perceive the world as one homogeneous, highly competitive marketplace: the world is “flat.”
Chapter 12: 8. Secrets
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.
Chapter 12: 8. Secrets
So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? What secrets are people not telling you?
Chapter 12: 8. Secrets
The food pyramid that told us to eat low fat and enormous amounts of grains was probably more a product of lobbying by Big Food than real science; its chief impact has been to aggravate our obesity epidemic.
Chapter 12: 8. Secrets
A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
Chapter 13: 9. Foundations
“Thiel’s law”: a startup messed up at its foundation cannot be fixed.
Chapter 13: 9. Foundations
To anticipate likely sources of misalignment in any company, it’s useful to distinguish between 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?
Chapter 13: 9. Foundations
In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus, and to exercise effective oversight. However, that very effectiveness means that a small board can forcefully oppose management in any conflict. This is why it’s crucial to choose wisely: every single member of your board matters. Even one problem director will cause you pain, and may even jeopardize your company’s future.
Chapter 13: 9. Foundations
A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.
Chapter 13: 9. Foundations
Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day.
Chapter 13: 9. Foundations
A company does better the less it pays the CEO—that’s one of the single clearest patterns I’ve noticed from investing in hundreds of startups. In no case should a CEO of an early-stage, venture-backed startup receive more than $150,000 per year in salary. It doesn’t matter if he got used to making much more than that at Google or if he has a large mortgage and hefty private school tuition bills. If a CEO collects $300,000 per year, he risks becoming more like a politician than a founder. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
Chapter 13: 9. Foundations
Low CEO pay also sets the standard for everyone else. Aaron Levie, the CEO of Box, was always careful to pay himself less than everyone else in the company—four years after he started Box, he was still living two blocks away from HQ in a one-bedroom apartment with no furniture except a mattress. Every employee noticed his obvious commitment to the company’s mission and emulated it. If a CEO doesn’t set an example by taking the lowest salary in the company, he can do the same thing by drawing the highest salary. So long as that figure is still modest, it sets an effective ceiling on cash compensation.
Chapter 13: 9. Foundations
However, high cash compensation teaches workers to claim value from the company as it already exists instead of investing their time to create new value in the future
Chapter 13: 9. Foundations
The graffiti artist who painted Facebook’s office walls in 2005 got stock that turned out to be worth $200 million, while a talented engineer who joined in 2010 might have made only $2 million. Since it’s impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret. Sending out a company-wide email that lists everyone’s ownership stake would be like dropping a nuclear bomb on your office.
Chapter 13: 9. Foundations
Anyone who prefers owning a part of your company to being paid in cash reveals a preference for the long term and a commitment to increasing your company’s value in the future. Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.
Chapter 13: 9. Foundations
Bob Dylan has said that he who is not busy being born is busy dying. If he’s right, being born doesn’t happen at just one moment—you might even continue to do it somehow, poetically at least.
Chapter 14: 10. The Mechanics of Mafia
Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together.
Chapter 14: 10. The Mechanics of Mafia
Talented people don’t need to work for you; they have plenty of options. You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
Chapter 14: 10. The Mechanics of Mafia
However, even a great mission is not enough. The kind of recruit who would be most engaged as an employee will also wonder: “Are these the kind of people I want to work with?” You should be able to explain why your company is a unique match for him personally. And if you can’t do that, he’s probably not the right match.
Chapter 14: 10. The Mechanics of Mafia
We all loved science fiction: Cryptonomicon was required reading, and we preferred the capitalist Star Wars to the communist Star Trek.
Chapter 14: 10. The Mechanics of Mafia
The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside it have missed.
Chapter 15: 11. If You Build It, Will They Come?
But advertising 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.
Chapter 15: 11. If You Build It, Will They Come?
Like acting, sales works 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. People who sell advertising are called “account executives.” People who sell customers work in “business development.” People who sell companies are “investment bankers.” And people who sell themselves are called “politicians.” There’s a reason for these redescriptions: none of us wants to be reminded when we’re being sold.
Chapter 15: 11. If You Build It, Will They Come?
Two metrics set the limits for effective distribution. The total net profit that you earn on average over the course of your relationship with a customer (Customer Lifetime Value, or CLV) must exceed the amount you spend on average to acquire a new customer (Customer Acquisition Cost, or CAC). In general, the higher the price of your product, the more you have to spend to make a sale—and the more it makes sense to spend it.
Chapter 15: 11. If You Build It, Will They Come?
Alex, who is Palantir’s CEO, spends 25 days a month on the road, meeting with clients and potential clients. Our deal sizes range from $1 million to $100 million. At that price point, buyers want to talk to the CEO, not the VP of Sales.
Chapter 15: 11. If You Build It, Will They Come?
The company states plainly on its website that “TV is a great big megaphone,” and when you can only afford to spend dozens of dollars acquiring a new customer, you need the biggest megaphone you can find.
Chapter 15: 11. If You Build It, Will They Come?
When we released our first software for the PalmPilot, we invited journalists to an event where they could hear James recite this immortal line: “I’ve been beaming people up my whole career, but this is the first time I’ve ever been able to beam money!” It flopped—the few who actually came to cover the event weren’t impressed. We were all nerds, so we had thought Scotty the Chief Engineer could speak with more authority than, say, Captain Kirk. (Just like a salesman, Kirk was always showboating out in some exotic locale and leaving it up to the engineers to bail him out of his own mistakes.) We were wrong: when Priceline.com cast William Shatner (the actor who played Kirk) in a famous series of TV spots, it worked for them. But by then Priceline was a major player. No early-stage startup can match big companies’ advertising budgets. Captain Kirk truly is in a league of his own.
Chapter 17: 13. Seeing Green
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?
Chapter 17: 13. Seeing Green
A great technology company should have proprietary technology an order of magnitude better than its nearest substitute
Chapter 17: 13. Seeing Green
Great companies have secrets: specific reasons for success that other people don’t see.
Chapter 18: 14. The Founder’s Paradox
When he was hired as interim CEO of Apple in 1997, the impeccably credentialed executives who preceded him had steered the company nearly to bankruptcy. That year Michael Dell famously said of Apple, “What would I do? I’d shut it down and give the money back to the shareholders.” Instead Jobs introduced the iPod (2001), the iPhone (2007), and the iPad (2010) before he had to resign in 2011 because of poor health. By the following year Apple was the single most valuable company in the world.
Chapter 18: 14. The Founder’s Paradox
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.
Chapter 18: 14. The Founder’s Paradox
The lesson for founders is that individual prominence and adulation can never be enjoyed except on the condition that it may be exchanged for individual notoriety and demonization at any moment—so be careful.
Chapter 19: Conclusion: Stagnation or Singularity?
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.