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

by Peter Thiel

HP’s board was a microcosm of the dysfunction: it split into two factions, only one of which cared about new technology. That faction was led by Tom Perkins, an engineer who first came to HP in 1963 to run the company’s research division at the personal request of Bill Hewlett and Dave Packard. At 73 years old in 2005, Perkins may as well have been a time-traveling visitor from a bygone age of optimism: he thought the board should identify the most promising new technologies and then have HP build them. But Perkins’s faction lost out to its rival, led by chairwoman Patricia Dunn. A banker by trade, Dunn argued that charting a plan for future technology was beyond the board’s competence. She thought the board should restrict itself to a night watchman’s role: Was everything proper in the accounting department? Were people following all the rules? Amid this infighting, someone on the board started leaking information to the press. When it was exposed that Dunn arranged a series of illegal wiretaps to identify the source, the backlash was worse than the original dissension, and the board was disgraced. Having abandoned the search for technological secrets, HP obsessed over gossip. As a result, by late 2012 HP was worth just $23 billion—not much more than it was worth in 1990, adjusting for inflation.

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. So you might ask: are there any fields that matter but haven’t been standardized and institutionalized? Physics, for example, is a real major at all major universities, and it’s set in its ways. The opposite of physics might be astrology, but astrology doesn’t matter. What about something like nutrition? Nutrition matters for everybody, but you can’t major in it at Harvard. Most top scientists go into other fields. Most of the big studies were done 30 or 40 years ago, and most are seriously flawed. The food pyramid that told us to eat low fat and enormous amounts of grains was probably more a product of lobbying by Big Food than real science; its chief impact has been to aggravate our obesity epidemic. There’s plenty more to learn: we know more about the physics of faraway stars than we know about human nutrition. It won’t be easy, but it’s not obviously impossible: exactly the kind of field that could yield secrets.

It was also true 227 years ago at the founding of our country: fundamental questions were open for debate by the Framers during the few months they spent together at the Constitutional Convention. How much power should the central government have? How should representation in Congress be apportioned? Whatever your views on the compromises reached that summer in Philadelphia, they’ve been hard to change ever since: after ratifying the Bill of Rights in 1791, we’ve amended the Constitution only 17 times. Today, California has the same representation in the Senate as Alaska, even though it has more than 50 times as many people. Maybe that’s a feature, not a bug. But we’re probably stuck with it as long as the United States exists. Another constitutional convention is unlikely; today we debate only smaller questions.

The CEO of a huge company like General Motors, for example, will own some of the company’s stock, but only a trivial portion of the total. Therefore he’s incentivized to reward himself through the power of possession rather than the value of ownership. Posting good quarterly results will be enough for him to keep his high salary and corporate jet. Misalignment can creep in even if he receives stock compensation in the name of “shareholder value.” If that stock comes as a reward for short-term performance, he will find it more lucrative and much easier to cut costs instead of investing in a plan that might create more value for all shareholders far in the future.

Unlike corporate giants, early-stage startups are small enough that founders usually have both ownership and possession. Most conflicts in a startup erupt between ownership and control—that is, between founders and investors on the board. The potential for conflict increases over time as interests diverge: a board member might want to take a company public as soon as possible to score a win for his venture firm, while the founders would prefer to stay private and grow the business.

When unsavvy observers see a nonprofit organization with dozens of people on its board, they think: “Look how many great people are committed to this organization! It must be extremely well run.” Actually, a huge board will exercise no effective oversight at all; it merely provides cover for whatever microdictator actually runs the organization. If you want that kind of free rein from your board, blow it up to giant size. If you want an effective board, keep it small.

As a general rule, everyone you involve with your company should be involved full-time. Sometimes you’ll have to break this rule; it usually makes sense to hire outside lawyers and accountants, for example. However, 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. That’s why hiring consultants doesn’t work. Part-time employees don’t work. Even working remotely should be avoided, because misalignment can creep in whenever colleagues aren’t together full-time, in the same place, every day.