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

by Blake Masters

The most contrarian thing of all is not to oppose the crowd but to think for yourself.

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.

Non-monopolists tell the opposite lie: “we’re in a league of our own.” Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets: British food ∩ restaurant ∩ Palo Alto Rap star ∩ hackers ∩ sharks Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets: search engine ∪ mobile phones ∪ wearable computers ∪ self-driving

In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t.

Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

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.

a great business is defined by its ability to generate cash flows in the future.

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.)

Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.

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.

Network effects make a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook,

Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small.

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: 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.

Service businesses especially are difficult to ...

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.

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.

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

Any big market is a bad choice, and a big market already served by competing companies is even worse.

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...

even if you do succeed in gaining a small foothold, you’ll have to be satisfied with keeping the lights on: cutthroat competit...

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

“Shallow men believe in luck, believe in circumstances…. Strong men believe in cause and effect.”

Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.

It’s still optimistic—you wouldn’t play in the markets if you expected to lose—but the fundamental tenet is that the market is random; you can’t know anything specific or substantive; diversification becomes supremely important.

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.

Politicians have always been officially accountable to the public at election time, but today they are attuned to what the public thinks at every moment. Modern polling enables politicians to tailor their image to match preexisting public opinion exactly, so for the most part, they do.

We are more fascinated today by statistical predictions of what the country will be thinking in a few weeks’ time than by visionary predictions of what the country will look like 10 or 20 years from now.

indefinite optimists: they didn’t have any specific vision of the future.

In philosophy, politics, and business, too, arguing over process has become a way to endlessly defer making concrete plans for a better future.

Today our society is permeated by the twin ideas that death is both inevitable and random.

Eroom’s law—that’s Moore’s law backward—observes that the number of new drugs approved per billion dollars spent on R&D has halved every nine years since 1950.

If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth.

Great companies can be built on open but unsuspected secrets about how the world works.

If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.

secrets of nature and secrets about people.

Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world.

Secrets about people are different: they are things that people don’t know about themselves or things they hide becau...

So when thinking about what kind of company to build, there are two distinct questions to ask: What secrets is nature not telling you? Wh...

The best place to look for secrets is where no one else is looking. Most people think only in terms of what they’ve been taught; schooling itself aims to impart conventional wisdom.

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.

who do you tell? Whoever you need to, and no more.

Cash is attractive. It offers pure optionality: once you get your paycheck, you can do anything you want with it. 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.

Any kind of cash is more about the present than the future.

people often find equity unattractive. It’s not liquid like cash. It’s tied to one specific company. And if that company doesn’t succeed, it’s worthless. Equity is a powerful tool precisely because of these limitations. 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.

The most valuable kind of company maintains an openness to invention that is most characteristic of beginnings. This leads to a second, less obvious understanding of the founding: it lasts as long as a company is creating new things, and it ends when creation stops. 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.

All salesmen are actors: their priority is persuasion, not sincerity.