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Whatever Einstein did or didn’t say, the power law—so named because exponential equations describe severely unequal distributions—is the law of the universe. It defines our surroundings so completely that we usually don’t even see it.
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.
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. That’s a phenomenal return, befitting the firm’s reputation as one of the Valley’s best. But in a weird way it’s not nearly enough, because Andreessen Horowitz has a $1.5 billion fund: if they only wrote $250,000 checks, they would need to find 19 Instagrams just to break even. This is why investors typically put a lot more money into any company worth funding. (And to be fair, Andreessen would have
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every single company in a good venture portfolio must have the potential to succeed at vast scale.
since nobody wants to give up on an investment, VCs usually spend even more time on the most problematic companies than they do on the most obviously successful.
It does matter what you do. 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’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.
conventional truth can be important—it’s essential to learn elementary mathematics, for example—but it won’t give you an edge. It’s not a secret.
Remember our contrarian question: what important truth do very few people agree with you on?
Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up.
Recall the business version of our contrarian question: what valuable company is nobody building? Every correct answer is necessarily a secret: something important and unknown, something hard to do but doable. If there are many secrets left in the world, there are probably many world-changing companies yet to be started. This chapter will help you think about secrets and how to find them.
If you overachieve and end up learning something that’s not on the test, you won’t receive credit for it. But in exchange for doing exactly what’s asked of you (and for doing it just a bit better than your peers), you’ll get an A. This process extends all the way up through the tenure track, which is why academics usually chase large numbers of trivial publications instead of new frontiers.
People are scared of secrets because they are scared of being wrong. By definition, a secret hasn’t been vetted by the mainstream. If your goal is to never make a mistake in your life, you shouldn’t look for secrets.
1999, nobody wanted to believe that the internet was irrationally overvalued. The same was true of housing in 2005: Fed chairman Alan Greenspan had to acknowledge some “signs of froth in local markets” but stated that “a bubble in home prices for the nation as a whole does not appear likely.” The market reflected all knowable information and couldn’t be questioned. Then home prices fell across the country, and the financial crisis of 2008 wiped out trillions. The future turned out to hold many secrets that economists could not make vanish simply by ignoring them.
You can’t find secrets without looking for them.
If you think something hard is impossible, you’ll never even start trying to achieve it. Belief in secrets is an effective truth. The actual truth is that there are many more secrets left to find, but they will yield only to relentless searchers.
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 reason that so many internet companies, including Facebook, are often underestimated—their very simplicity—is itself an argument for secrets. If insights that look so elementary in retrospect can support important and valuable businesses, there must remain many great companies still to start.
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?
Secrets about people are relatively underappreciated.
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.
The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world;
“Thiel’s law”: a startup messed up at its foundation cannot be fixed.
As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.
Optimism abounds at the start of every relationship. It’s unromantic to think soberly about what could go wrong, so people don’t.
Founders should share a prehistory before they start a company together—otherwise they’re just rolling dice.
“if men were angels, no government would be necessary.”
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?
In the boardroom, less is more.
As a general rule, everyone you involve with your company should be involved full-time.
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.
you’re either on the bus or off the bus.
Any kind of cash is more about the present than the future.
Startups don’t need to pay high salaries because they can offer something better: part ownership of the company itself. 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.
no company has a culture; every company is a culture. A startup is a team of people on a mission, and a good culture is just what that looks like on the inside.
Since time is your most valuable asset, it’s odd to spend it working with people who don’t envision any long-term future together.
The only good answers are specific to your company, so you won’t find them in this book. But there are two general kinds of good answers: answers about your mission and answers about your team.
the opportunity to do irreplaceable work on a unique problem alongside great people. You probably can’t be the Google of 2014 in terms of compensation or perks, but you can be like the Google of 1999 if you already have good answers about your mission and team.
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.
Most fights inside a company happen when colleagues compete for the same responsibilities.
customers will not come just because you build it. You have to make that happen, and it’s harder than it looks.
What nerds miss is that it takes hard work to make sales look easy.
sales works best when hidden.
most fundamental reason that even businesspeople underestimate the importance of sales is the systematic effort to hide it at every level of every field in a world secretly driven by it.
It’s better to think of distribution as something essential to the design of your product.
