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

by Blake Masters

The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking

But there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology.

1. 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. 2. 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. 3. 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. 4. 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.

2. A bad plan is better than no plan.

The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly.

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.

The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits. To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state, or innovates its way to the top.

The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.

How much of the world is actually monopolistic? How much is truly competitive? It’s hard to say,

In business, money is either an important thing or it is everything.

If your industry is in a competitive equilibrium, the death of your business won’t matter to the world;

Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.

CREATIVE MONOPOLY MEANS new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival. So why do people believe that competition is healthy?

even though the more we compete, the less we gain.

but we’ve all been trained to ignore it.

anyone would fight for things that matter; 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.

there’s no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable.

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.

Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.

monopoly business gets stronger as it gets bigger:

Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.

so creating a strong brand is a powerful way to claim a monopoly.

sleek minimalist design and close control over the consumer experience, the omnipresent advertising campaigns, the price positioning as a maker of premium goods, and the lingering nimbus of Steve Jobs’s personal charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own.

software (like touchscreen interfaces purpose-designed for specific materials). It manufactures products at a scale large enough to dominate pricing for the materials it buys. And it enjoys strong network effects from its content ecosystem: thousands of developers write software for Apple devices because that’s where hundreds of millions of users are, and those users stay on the platform because it’s where the apps are. These other monopolistic advantages are less obvious than Apple’s sparkling brand,

Apple’s monopoly.

When Steve Jobs returned to Apple, he didn’t just make Apple a cool place to work; he slashed product lines to focus on the handful of opportunities for 10x improvements. No technology company can be built on branding alone.

Brand, scale, network effects, and technology in some combination define a monopoly; but to get them to work, you need to choose your market carefully and expand deliberately.

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.

Small doesn’t mean nonexistent.

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. Amazon shows how it can be done. Jeff Bezos’s founding vision was to dominate all of online retail, but he very deliberately started with books. There were millions of books to catalog, but they all had roughly the same shape, they were easy to ship, and some of the most rarely sold books—those least profitable for any retail store to keep in stock—also drew the most enthusiastic customers. Amazon became the dominant solution for anyone located far from a bookstore or seeking something unusual. Amazon then had two options: expand the number of people who read books, or expand to adjacent markets. They chose the latter, starting with the most similar markets: CDs, videos, and software. Amazon continued to add categories gradually until it had become the world’s general store. The name itself brilliantly encapsulated the company’s scaling strategy. The biodiversity of the Amazon rain forest reflected Amazon’s first goal of cataloging every book in the world, and now it stands for every kind of thing in the world, period. eBay also started by dominating small niche markets. When it launched its auction marketplace in 1995, it didn’t need the whole world to adopt it at once; the product worked well for intense interest groups, like Beanie Baby obsessives. Once it monopolized the Beanie Baby trade, eBay didn’t jump straight to listing sports cars or industria...

But moving first is a tactic, not a goal.

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. In this one particular at least, business is like chess. Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”

Hundreds of people have started multiple multimillion-dollar businesses. A few, like Steve Jobs, Jack Dorsey, and Elon Musk, have created several multibillion-dollar companies. If success were mostly a matter of luck, these kinds of serial entrepreneurs probably wouldn’t exist.

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. This is not what young people do today, because everyone around them has long since lost faith in a definite world.

wealthy Chinese trying hard to get their money out of the country. Poorer Chinese just save everything they can and hope it will be enough. Every class of people in China takes the future deadly seriously.

• The founders don’t know what to do with it, so they give it to a large bank. • The bankers don’t know what to do with it, so they diversify by spreading it across a portfolio of institutional investors. • Institutional investors don’t know what to do with their managed capital, so they diversify by amassing a portfolio of stocks. • Companies try to increase their share price by generating free cash flows. If they do, they issue dividends or buy back shares and the cycle repeats.

But in an indefinite world, people actually prefer unlimited optionality; money is more valuable than anything you could possibly do with it. Only in a definite future is money a means to an end, not the end itself.

why should you expect your own business to succeed without a plan to make it happen?

but in startups, intelligent design works best.

It’s true that every great entrepreneur is first and foremost a designer.

But the most important lesson to learn from Jobs has nothing to do with aesthetics. The greatest thing Jobs designed was his business. Apple imagined and executed definite multi-year plans to create new products and distribute them effectively.

Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.

Long-term planning is often undervalued by our indefinite short-term world. When the first iPod was released in October 2001, industry analysts couldn’t see much more than “a nice feature for Macintosh users” that “doesn’t make any difference” to the rest of the world. Jobs planned the iPod to be the first of a new generation of portable post-PC devices, but that secret was invisi...

The power of planning explains the difficulty of valuing private companies. When a big company makes an offer to acquire a successful startup, it almost always offers too much or too little: founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough. When Yahoo! offered to buy Facebook for $1 billion in July 2006, I thought we should at least consider it. But Mark Zuckerberg walked into the board meeting and announced: “Okay, guys, this is just a formality, it shouldn’t take more than 10 minutes. We’re obviously not going to sell here.” Mark saw where he could take the company, and Yahoo! didn’t. A

business with a good definite plan will always be underrated in a world where people see the future as random.

Consider what happens when you break the first rule. Andreessen Horowitz invested $250,000 in Instagram in 2010. When Facebook bought Instagram just two years later for $1 billion, Andreessen netted $78 million—a 312x return in less than two years.