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

by Blake Masters

Humans don’t decide what to build by making choices from some cosmic catalog of options given in advance; instead, by creating new technologies, we rewrite the plan of the world.

In the most minimal sense, the future is simply the set of all moments yet to come.

Startups operate on the principle that you need to work with other people to get stuff done, but you also need to stay small enough so that you actually can.

perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines.

if you want to create and capture lasting value, don’t build an undifferentiated commodity business.

Suppose you want to start a restaurant that serves British food in Palo Alto. “No one else is doing it,” you might reason. “We’ll own the entire market.” But that’s only true if the relevant market is the market for British food specifically.

Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future.

the history of progress is a history of better monopoly businesses replacing incumbents.

Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.

So why are economists obsessed with competition as an ideal state? It’s a relic of history. Economists copied their mathematics from the work of 19th-century physicists: they see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that’s what’s easy to model, not because it represents the best of business. But it’s worth recalling that the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed and everything comes to rest—also known as the h...

Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” 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.

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.

More than anything else, competition is an ideology—the ideology—that pervades our society and distorts our thinking. We preach competition, internalize its necessity, and enact its commandments; and as a result, we trap ourselves within it—even though the more we compete, the less we gain. This is a simple truth, but we’ve all been trained to ignore it. Our educational system both drives and reflects our obsession with competition. Grades themselves allow precise measurement of each student’s competitiveness; pupils with the highest marks receive status and credentials. We teach every young person the same subjects in mostly the same ways, irrespective of individual talents and preferences. Students who don’t learn best by sitting still at a desk are made to feel somehow inferior, while children who excel on conventional measures like tests and assignments end up defining their identities in terms of this weirdly contrived academic parallel reality.

At one point, Ellison sent truckloads of ice cream sandwiches to Siebel’s headquarters to try to convince Siebel employees to jump ship. The copy on the wrappers? “Summer is near. Oracle is here. To brighten your day and your career.”

Twitter went public in 2013, it was valued at $24 billion—more than 12 times the Times’s market capitalization—even though the Times earned $133 million in 2012 while Twitter lost money. What explains the huge premium for Twitter? 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.

Simply stated, the value of a business today is the sum of all the money it will make in the future. (To properly value a business, you also have to discount those future cash flows to their present worth, since a given amount of money today is worth more than the same amount 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? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.

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. Google’s search algorithms, for example, return results better than anyone else’s. Proprietary technologies for extremely short page load times and highly accurate query autocompletion add to the core search product’s robustness and defensibility.

As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market.

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.

Paradoxically, then, network effects businesses must start with especially small markets. 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.

A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.

A good startup should have the potential for great scale built into its first design.

A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly. Today’s strongest tech brand is Apple: the attractive looks and carefully chosen materials of products like the iPhone and MacBook, the Apple Stores’ 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.

The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.

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.”

Ralph Waldo Emerson captured this ethos when he wrote: “Shallow men believe in luck, believe in circumstances…. Strong men believe in cause and effect.” In 1912, after he became the first explorer to reach the South Pole, Roald Amundsen wrote: “Victory awaits him who has everything in order—luck, people call it.”

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.

what important truth do very few people agree with you on?

He divided human goals into three groups: 1. Goals that can be satisfied with minimal effort; 2. Goals that can be satisfied with serious effort; and 3. Goals that cannot be satisfied, no matter how much effort one makes. This is the classic trichotomy of the easy, the hard, and the impossible. Kaczynski

Great companies can be built on open but unsuspected secrets about how the world works. Consider the Silicon Valley startups that have harnessed the spare capacity that is all around us but often ignored. Before Airbnb, travelers had little choice but to pay high prices for a hotel room, and property owners couldn’t easily and reliably rent out their unoccupied space. Airbnb saw untapped supply and unaddressed demand where others saw nothing at all. The same is true of private car services Lyft and Uber. Few people imagined that it was possible to build a billion-dollar business by simply connecting people who want to go places with people willing to drive them there. We already had state-licensed taxicabs and private limousines; only by believing in and looking for secrets could you see beyond the convention to an opportunity hidden in plain sight.

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?

The few who knew what might be learned, Foolish enough to put their whole heart on show, And reveal their feelings to the crowd below, Mankind has always crucified and burned.

Unless you have perfectly conventional beliefs, it’s rarely a good idea to tell everybody everything that you know. So who do you tell? Whoever you need to, and no more. In

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.

If you get the founding moment right, you can do more than create a valuable company: you can steer its distant future toward the creation of new things instead of the stewardship of inherited success. You might even extend its founding indefinitely.

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.

advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.

There’s a wide range of sales ability: there are many gradations between novices, experts, and masters. There are even sales grandmasters. If you don’t know any grandmasters, it’s not because you haven’t encountered them, but rather because their art is hidden in plain sight. Tom Sawyer managed to persuade his neighborhood friends to whitewash the fence for him—a masterful move. But convincing them to actually pay him for the privilege of doing his chores was the move of a grandmaster, and his friends were none the wiser.

A lawyer prides himself on professional credentials, but law firms are led by the rainmakers who bring in big clients.

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.

Palantir, the data analytics company I co-founded with my law school classmate Alex Karp, doesn’t employ anyone separately tasked with selling its product. Instead, 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.

Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.

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?

seven questions that every business must answer: 1. The Engineering Question Can you create breakthrough technology instead of incremental improvements? 2. The Timing Question Is now the right time to start your particular business? 3. The Monopoly Question Are you starting with a big share of a small market? 4. The People Question Do you have the right team? 5. The Distribution Question Do you have a way to not just create but deliver your product? 6. The Durability Question Will your market position be defensible 10 and 20 years into the future? 7. The Secret Question Have you identified a unique opportunity that others don’t see?

Customers won’t care about any particular technology unless it solves a particular problem in a superior way. And if you can’t monopolize a unique solution for a small market, you’ll be stuck with vicious competition.

huge markets are highly competitive, not highly attainable.

cleantech executives were running around wearing suits and ties. This was a huge red flag, because real technologists wear T-shirts and jeans. So we instituted a blanket rule: pass on any company whose founders dressed up for pitch meetings.