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

by Peter Thiel

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.

Sometimes there are hidden obstacles to scaling—a lesson that eBay has learned in recent years. Like all marketplaces, the auction marketplace lent itself to natural monopoly because buyers go where the sellers are and vice versa. But eBay found that the auction model works best for individually distinctive products like coins and stamps. It works less well for commodity products:

Sequencing markets correctly is underrated, and it takes discipline to expand gradually. The most successful companies make the core progression—to first dominate a specific niche and then scale to adjacent markets—a part of their founding narrative.

However, disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new. This seemingly trivial fad matters because it distorts an entrepreneur’s self-understanding in an inherently competitive way. The concept was coined to describe threats to incumbent companies, so startups’ obsession with disruption means they see themselves through older firms’ eyes.

if you truly want to make something new, the act of creation is far more important than the old industries that might not like what you create.

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

moving first is a tactic, not a goal. What really matters is generating cash flows in the future, 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.

THE MOST CONTENTIOUS question in business is whether success comes from luck or skill.

However, the phenomenon of serial entrepreneurship would seem to call into question our tendency to explain success as the product of chance. 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.

Every company starts in unique circumstances, and every company starts only once. Statistics doesn’t work when the sample size is one.

You can expect the future to take a definite form or you can treat it as hazily uncertain. If you treat the future as something definite, it makes sense to understand it in advance and to work to shape it.

Indefinite attitudes to the future explain what’s most dysfunctional in our world today. Process trumps substance:

By the time a student gets to college, he’s spent a decade curating a bewilderingly diverse résumé to prepare for a completely unknowable future. Come what may, he’s ready—for nothing in particular.

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.

The indefinite pessimist can’t know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania.

A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it.

To a definite optimist, the future will be better than the present if he plans and works to make it better.

Even the Great Depression failed to impede relentless progress in the United States, which has always been home to the world’s most far-seeing definite optimists.

In the 1950s, people welcomed big plans and asked whether they would work. Today a grand plan coming from a schoolteacher would be dismissed as crankery, and a long-range vision coming from anyone more powerful would be derided as hubris.

To an indefinite optimist, the future will be better, but he doesn’t know how exactly, so he won’t make any specific plans. He expects to profit from the future but sees no reason to design it concretely.

Instead of working for years to build a new product, indefinite optimists rearrange already-invented ones.

But they miss the even bigger social context for their own preferred explanations: a whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.

While a definitely optimistic future would need engineers to design underwater cities and settlements in space, an indefinitely optimistic future calls for more bankers and lawyers. Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.

The indefiniteness of finance can be bizarre. Think about what happens when successful entrepreneurs sell their company. What do they do with the money? In a financialized world, it unfolds like this: • 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. At no point does anyone in the chain know what to do with money in the real economy. 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.

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.

If American households were saving, at least they could expect to have money to spend later. And if American companies were investing, they could expect to reap the rewards of new wealth in the future. But U.S. households are saving almost nothing. And U.S. companies are letting cash pile up on their balance sheets without investing in new projects because they don’t have any concrete plans for the future.

The other three views of the future can work. Definite optimism works when you build the future you envision. Definite pessimism works by building what can be copied without expecting anything new. Indefinite pessimism works because it’s self-fulfilling: if you’re a slacker with low expectations, they’ll probably be met. But indefinite optimism seems inherently unsustainable: how can the future get better if no one plans for it?

A company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen?

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. Forget “minimum viable products”—ever

Long-term planning is often undervalued by our indefinite short-term world.

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

A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

never underestimate exponential growth.

This chapter shows how the power law becomes visible when you follow the money:

Most businesses never need to deal with venture capital, but everyone needs to know exactly one thing that even venture capitalists struggle to understand: we don’t live in a normal world; we live under a power law.

Venture capitalists aim to identify, fund, and profit from promising early-stage companies. They raise money from institutions and wealthy people, pool it into a fund, and invest in technology companies that they believe will become more valuable. If they turn out to be right, they take a cut of the returns—usually 20%.

Every VC knows that his task is to find the companies that will succeed. However, even seasoned investors understand this phenomenon only superficially. They know companies are different, but they underestimate the degree of difference.

The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers.

this “spray and pray” approach usually produces an entire portfolio of flops, with no hits at all. This is because venture returns don’t follow a normal distribution overall. Rather, they follow a power law: a small handful of companies radically outperform all others.

Our results at Founders Fund illustrate this skewed pattern: Facebook, the best investment in our 2005 fund, returned more than all the others combined. Palantir, the second-best investment, is set to return more than the sum of every other investment aside from Facebook.

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 retur...

rule number two: because rule number one is so restrictive, there can’t be any other rules.

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. 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.

once you think that you’re playing the lottery, you’ve already psychologically prepared yourself to lose.

Why would professional VCs, of all people, fail to see the power law? For one thing, it only becomes clear over time, and even technology investors too often live in the present.

no matter how unambiguous the end result of the power law, it doesn’t reflect daily experience.

Most of the differences that investors and entrepreneurs perceive every day are between relative levels of success, not between exponential dominance and failure.

If even investors specializing in exponentially growing startups miss the power law, it’s not surprising that most everyone else misses it, too.

Power law distributions are so big that they hide in plain sight.