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

by Blake Masters

The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.

Unless they invest in the difficult task of creating new things, companies will fail in the future no matter how big their profits remain today. What happens when we’ve gained everything to be had from fine-tuning the old lines of business that we’ve inherited?

Today’s “best practices” lead to dead ends; the best paths are new and untried.

Technology is miraculous because it allows us to do more with less, ratcheting up our fundamental capabilities to a higher level.

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. These are the kind of elementary truths we teach to second graders, but they are easy to forget in a world where so much of what we do is repeat what has been done before.

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.

successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.

“Most people believe in x, but the truth is the opposite of x.”

what makes the future distinctive and important isn’t that it hasn’t happened yet, but rather that it will be a time when the world looks different from today. In this sense, if nothing about our society changes for the next 100 years, then the future is over 100 years away. If things change radically in the next decade, then the future is nearly at hand.

No one can predict the future exactly, but we know two things: it’s going to be different, and it must be rooted in today’s world.

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. Vertical progress is harder to imagine because it requires doing something nobody else has ever done. If you take one typewriter and build 100, you have made horizontal progress. If you have a typewriter and build a word processor, you have made vertical progress.

At the macro level, the single word for horizontal progress is globalization—taking things that work somewhere and making them work everywhere. China is the paradigmatic example of globalization;

The single word for vertical, 0 to 1 progress is technology.

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

Since 1971, we have seen rapid globalization along with limited technological development, mostly confined to IT.

Even our everyday language suggests we believe in a kind of technological end of history: the division of the world into the so-called developed and developing nations implies that the “developed” world has already achieved the achievable, and that poorer nations just need to catch up.

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.

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.

Our ancestors lived in static, zero-sum societies where success meant seizing things from others.

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.

Today our challenge is to both imagine and create the new technologies that can make the 21st century more peaceful and prosperous than the 20th.

New technology tends to come from new ventures—startups.

small groups of people bound together by a sense of mission have changed the world for the better.

it’s hard to develop new things in big organizations, and it’s even harder to do it by yourself. Bureaucratic hierarchies move slowly, and entrenched interests shy away from risk.

In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this d...

a lone genius might create a classic work of art or literature, but he could never c...

you need to work with other people to get stuff done, but you also need to stay small enoug...

Positively defined, a startup is the largest group of people you can convince of a plan t...

A new company’s most important strength is new thinking: even more important than nimbleness, small...

what a startup has to do: question received ideas and rethink business from scratch.

If you can identify a delusional popular belief, you can find what lies hidden behind it: the contrarian truth.

Conventional beliefs only ever come to appear arbitrary and wrong in retrospect; whenever one collapses, we call the old belief a bubble.

Skeptics questioned earnings and revenue multiples higher than those for any non-internet company. It was easy to conclude that the market had gone crazy.

Legions of people decamped from their well-paying jobs to found or join startups.

the most “successful” companies seemed to embrace a sort of anti-business model where they lost money as they grew.

irrationality was rational given that appending “.com” to your name could double your value overnight. DOT-COM BOOM PAYPAL MANIA

we didn’t have enough customers, growth was slow, and expenses mounted. For PayPal to work, we needed to attract a critical mass of at least a million users. Advertising was too ineffective to justify the cost. Prospective deals with big banks kept falling through. So we decided to pay people to sign up. 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.

to dismiss as an extremist anyone with plans big enough to be measured in years instead of quarters. Globalization replaced technology as the hope for the future.

The entrepreneurs who stuck with Silicon Valley learned four big lessons from the dot-com crash that still guide business thinking today: 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.

1. It is better to risk boldness than triviality. 2. A bad plan is better than no plan. 3. Competitive markets destroy profits. 4. Sales matters just as much as product.

That doesn’t mean the opposite ideas are automatically true: you can’t escape the madness of crowds by dogmatically rejecting them.

how much of what you know about business is shaped by mistaken reactions to past mistakes?

The most contrarian thing of all is not to oppose the crowd but t...

THE BUSINESS VERSION of our contrarian question is: what valuable company is nobody building?

your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create.

even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline i...

So-called 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 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.

Google is a good example of a company that went from 0 to 1: it hasn’t competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!