Zero to One

Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.

A new company’s most important strength is new thinking: even more important than nimbleness, small size affords space to think.

If there is money to be made, new firms will enter the market, increase supply, drive prices down, and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.

War is costly business.

Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past.

Competition can make people hallucinate opportunities where none exist.

Winning is better than losing, but everybody loses when the war isn’t one worth fighting.

Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.

If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most.

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,

Simply stated, the value of a business today is the sum of all the money it will make in the future.

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?

What does a company with large cash flows far into the future look like? 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 is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.

The clearest way to make a 10x improvement is to invent something completely new. If you build something valuable where there was nothing before, the increase in value is theoretically infinite.

Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.

This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market. In practice, a large market will either lack a good starting point or it will be open to competition, so it’s hard to ever reach that 1%. And even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competition means your profits will be zero.

Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.

Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible.

What really matters is generating cash flows in the future, so being the first mover doesn’t do you any good if someone else comes along and unseats you. 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. The way to do that is to dominate a small niche and scale up from there, toward your ambitious long-term vision.

A definite view, by contrast, favors firm convictions. 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. Instead of working tirelessly to make herself indistinguishable, she strives to be great at something substantive—to be a monopoly of one.

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.

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.

Time and decision-making themselves follow a power law, and some moments matter far more than others—see Chapter 9. However, you can’t trust a world that denies the power law to accurately frame your decisions for you, so what’s most important is rarely obvious. It might even be secret. But in a power law world, you can’t afford not to think hard about where your actions will fall on the curve.

A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.

Companies are like countries in this way. Bad decisions made early on—if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anybody will even try to correct them. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.

Now when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much.

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?

A board of three is ideal. Your board should never exceed five people, unless your company is publicly held.

anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned. At the margin, they’ll be biased to claim value in the near term, not help you create more in the future. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time,

Equity is the one form of compensation that can effectively orient people toward creating value in the future.

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.

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.

“Company culture” doesn’t exist apart from the company itself: no company has a culture; every company is a culture.

You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done. That’s the only thing that can make its importance unique.

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.

Above all, don’t fight the perk war. Anybody who would be more powerfully swayed by free laundry pickup or pet day care would be a bad addition to your team. Just cover the basics like health insurance and then promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.

The best thing I did as a manager at PayPal was to make every person in the company responsible for doing just one thing. Every employee’s one thing was unique, and everyone knew I would evaluate him only on that one thing. I had started doing this just to simplify the task of managing people. But then I noticed a deeper result: defining roles reduced conflict. Most fights inside a company happen when colleagues compete for the same responsibilities.

Like acting, sales works best when hidden.

If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business—no matter how good the product.

Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product—even if it easily fits into already established habits and anybody who tries it likes it immediately—you must still support it with a strong distribution plan.

One of these methods is likely to be far more powerful than every other for any given business: distribution follows a power law of its own.

Most businesses get zero distribution channels to work: poor sales rather than bad product is 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.

Your company needs to sell more than its product. You must also sell your company to employees and investors. There is a “human resources” version of the lie that great products sell themselves: “This company is so good that people will be clamoring to join it.” And there’s a fundraising version too: “This company is so great that investors will be banging down our door to invest.” Clamor and frenzy are very real, but they rarely happen without calculated recruiting and pitching beneath the surface.

Selling your company to the media is a necessary part of selling it to everyone else.

But that premise is wrong: computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.

As computers become more and more powerful, they won’t be substitutes for humans: they’ll be complements.

Doctors need to marry clinical understanding with an ability to communicate it to non-expert patients. And good teachers aren’t just experts in their disciplines: they must also understand how to tailor their instruction to different individuals’ interests and learning styles. Computers might be able to do some of these tasks, but they can’t combine them effectively. Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.

But the most valuable companies in the future won’t ask what problems can be solved with computers alone. Instead, they’ll ask: how can computers help humans solve hard problems?

This hints at the strange way in which the companies that create new technology often resemble feudal monarchies rather than organizations that are supposedly more “modern.” A unique founder can make authoritative decisions, inspire strong personal loyalty, and plan ahead for decades.