The best book on entrepreneurship, innovation, and what makes great companies great. Fascinating thoughts of how to build the future, as well as definite/indefinite optimism/pessimism. A must-read for any founder.
Every moment in business happens only once. 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, American companies will fail in the future no matter how big their profits remain today.
Ask: “What important truth do very few people agree with you on?”
A good answer takes the following form: “Most people believe in x, but the truth is the opposite of x.”
The business version of our contrarian question is: what valuable company is nobody building?
If nothing about our society changes for the next 100 years, then the future is over 100 years away.
Horizontal or extensive progress means copying things that work— going from 1 to n.
Vertical or intensive progress means doing new things— going from 0 to 1.
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.
The single word for horizontal progress is globalization—taking things that work somewhere and making them work everywhere.
The single word for vertical, 0 to 1 progress is technology.
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.
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.
In the most dysfunctional organizations, signaling that work is being done becomes a better strategy for career advancement than actually doing work (if this describes your company, you should quit now).
Positively defined, a startup is the largest group of people you can convince of a plan to build a different future.
Everyone learned to treat the future as fundamentally indefinite, and 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.
Silicon Valley entrepreneurs learned four big lessons from the dot-com crash:
And yet the opposite principles are probably more correct:
Under perfect competition, in the long run no company makes an economic profit.
Monopoly: the kind of company that’s so good at what it does that no other firm can offer a close substitute. Google is a good example: it hasn’t competed in search since the early 2000s
Capitalism and competition are opposites.
If you want to create and capture lasting value, don’t build an undifferentiated commodity business.
Monopolists lie to protect themselves usually by exaggerating the power of their (nonexistent) competition.
Non-monopolists tell the opposite lie: “we’re in a league of our own.”
The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.
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.
In a static world, a monopolist is just a rent collector. But the world we live in is dynamic: it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world.
The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation.
Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Then monopolies can keep innovating because profits enable them to make the long -term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.
Tolstoy opens Anna Karenina by observing: “All happy families are alike; each unhappy family is unhappy in its own way.”
Business is the opposite. All happy companies are different: each one earns a monopoly by solving a unique problem.
All failed companies are the same: they failed to escape competition.
Higher education is the place where people who had big plans in high school get stuck in fierce rivalries with equally smart peers over conventional careers like management consulting and investment banking. For the privilege of being turned into conformists, students (or their families) pay hundreds of thousands of dollars in skyrocketing tuition that continues to outpace inflation. All Rhodes Scholars had a great future in their past.
Professors downplay the cutthroat culture of academia, but managers never tire of comparing business to war.
Why individuals with Asperger’s seem to be at an advantage in Silicon Valley today: If you’re less sensitive to social cues, you’re less likely to do the same things as everyone else around you. If you’re interested in making things or programming computers , you’ll be less afraid to pursue those activities single-mindedly and thereby become incredibly good at them. Then when you apply your skills, you’re a little less likely than others to give up your own convictions: this can save you from getting caught up in crowds competing for obvious prizes.
Simply stated, the value of a business today is the sum of all the money it will make in the future.
If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?
Every monopoly is unique, but they usually share some combination of the following characteristics:
Proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell. The clearest way to make a 10x improvement is to invent something completely new.
Network effects businesses must start with especially small markets, so small that they often don’t even appear to be business opportunities at all.
Every startup should start with a very small market. Always err on the side of starting too small. The reason is simple: it’s easier to dominate a small market than a large one. If you think your initial market might be too big, it almost certainly is.
The perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
A 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.
It’s always a red flag when entrepreneurs talk about getting 1% of a $ 100 billion market.
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.
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.
From the Renaissance and the Enlightenment to the mid-20th century, luck was something to be mastered, dominated, and controlled; everyone agreed that you should do what you could, not focus on what you couldn’t.
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: when people lack concrete plans to carry out, they use formal rules to assemble a portfolio of various options.
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.
An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it. This describes Europe since the early 1970s, when the continent succumbed to undirected bureaucratic drift. 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. Perhaps surprisingly, China is probably the most definitely pessimistic place in the world today. Every other country is afraid that China is going to take over the world; China is the only country afraid that it won’t.
To a definite optimist, the future will be better than the present if he plans and works to make it better. From the 17th century through the 1950s and ’60s, definite optimists led the Western world. 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.
Big plans for the future have become archaic curiosities.
After a brief pessimistic phase in the 1970s, indefinite optimism has dominated American thinking ever since 1982, when a long bull market began and finance eclipsed engineering as the way to approach the future. 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.
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.
In philosophy, politics, and business, arguing over process has become a way to endlessly defer making concrete plans for a better future.
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?
When a big company makes an offer to acquire a successful startup, it almost always offers too much or too little: founders only sell when they have no more concrete visions for the company, in which case the acquirer probably overpaid; definite founders with robust plans don’t sell, which means the offer wasn’t high enough.
Small minorities often achieve disproportionate results. Monopoly businesses capture more value than millions of undifferentiated competitors.
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:
Less than 1% of new businesses started each year in the U.S. receive venture funding, and total VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP. Indeed, the dozen largest tech companies were all venture-backed. Together those 12 companies are worth more than $ 2 trillion, more than all other tech companies combined.
Every individual is unavoidably an investor, too. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now.
Life is not a portfolio: not for a startup founder, and not for any individual. An entrepreneur cannot “diversify” herself : you cannot run dozens of companies at the same time and then hope that one of them works out well. Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.
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.
Every one of today's most famous and familiar ideas was once unknown and unsuspected.
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.
Kaczynski claimed that in order to be happy, every individual needs to have goals whose attainment requires effort, and needs to succeed in attaining at least some of his goals.” He divided human goals into three groups:
Four social trends have conspired to root out belief in secrets.
How must you see the world if you don’t believe in secrets? You’d have to believe we’ve already solved all great questions.
There are many more secrets left to find, but they will yield only to relentless searchers. There is more to do in science, medicine, engineering, and in technology of all kinds. We are within reach not just of marginal goals set at the competitive edge of today’s conventional disciplines, but of ambitions so great that even the boldest minds of the Scientific Revolution hesitated to announce them directly.
We could cure cancer, dementia, and all the diseases of age and metabolic decay. We can find new ways to generate energy that free the world from conflict over fossil fuels. We can invent faster ways to travel from place to place over the surface of the planet; we can even learn how to escape it entirely and settle new frontiers. But we will never learn any of these secrets unless we demand to know them and force ourselves to look.
What secrets is nature not telling you? What secrets are people not telling you?
What are people not allowed to talk about? What is forbidden or taboo?
The best place to look for secrets is where no one else is looking.
Are there any fields that matter but haven’t been standardized and institutionalized?
“Thiel’s law”: a startup messed up at its foundation cannot be fixed.
Now when I consider investing in a startup, I study the founding teams. Technical abilities and complementary skill sets matter, but how well the founders know each other and how well they work together matter just as much. Founders should share a prehistory before they start a company together— otherwise they’re just rolling dice.
Most conflicts in a startup erupt between ownership and control— that is, between founders and investors on the board.
In the boardroom, less is more. The smaller the board, the easier it is for the directors to communicate, to reach consensus , and to exercise effective oversight. A board of three is ideal and should never exceed five people, unless your company is publicly held.
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. That’s why hiring consultants doesn’t work. Part-time employees don’t work.
A company does better the less it pays the CEO. In no case should a CEO of an early-stage, venture-backed startup receive more than $ 150,000 per year in salary. High pay incentivizes him to defend the status quo along with his salary, not to work with everyone else to surface problems and fix them aggressively. A cash-poor executive, by contrast, will focus on increasing the value of the company as a whole.
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.
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.
“Company culture” doesn’t exist apart from the company itself: 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. If you can’t count durable relationships among the fruits of your time at work, you haven’t invested your time well—even in purely financial terms. We set out to hire people who would actually enjoy working together. They had to be talented, but even more than that they had to be excited about working specifically with us. That was the start of the PayPal Mafia.
You should ask yourself a more pointed version of the question: Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
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. You’ll attract the employees you need if you can explain why your mission is compelling: not why it’s important in general, but why you’re doing something important that no one else is going to get done.
Promise what no others can: the opportunity to do irreplaceable work on a unique problem alongside great people.
From the outside, everyone in your company should be different in the same way.
Max Levchin, my co-founder at PayPal, says that startups should make their early staff as personally similar as possible.
The early PayPal team worked well together because we were all the same kind of nerd. We all loved science fiction: Cryptonomicon was required reading, and we preferred the capitalist Star Wars to the communist Star Trek. Most important, we were all obsessed with creating a digital currency that would be controlled by individuals instead of governments. For the company to work, it didn’t matter what people looked like or which country they came from, but we needed every new hire to be equally obsessed.
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. Eliminating competition makes it easier for everyone to build the kinds of long-term relationships that transcend mere professionalism . More than that, internal peace is what enables a startup to survive at all.
In the most intense kind of organization, members only hang out with other members.
The best startups might be considered slightly less extreme kinds of cults. The biggest difference is that cults tend to be fanatically wrong about something important. People at a successful startup are fanatically right about something those outside it have missed.
In Silicon Valley, nerds are skeptical of advertising, marketing, and sales because they seem superficial and irrational. But advertising matters because it works. It works on nerds, and it works on you. You may think that you’re an exception; that your preferences are authentic, and advertising only works on other people
Advertising doesn’t exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.
People overestimate the relative difficulty of science and engineering, because the challenges of those fields are obvious. What nerds miss is that it takes hard work to make sales look easy.
Like acting, sales works best when hidden. This explains why almost everyone whose job involves distribution— whether they’re in sales, marketing, or advertising— has a job title that has nothing to do with those things
If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business— no matter how good the product.
Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true. No matter how strong your product— even if it easily fits into already established habits and anybody who tries it likes it immediately— you must still support it with a strong distribution plan.
Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.
Most businesses get zero distribution channels to work: poor sales rather than bad product is the most common cause of failure. If you can get just one distribution channel to work, you have a great business. If you try for several but don’t nail one, you’re finished.
Computers are complements for humans, not substitutes. The most valuable businesses of coming decades will be built by entrepreneurs who seek to empower people rather than try to make them obsolete.
Seven questions that every business must answer:
An entrepreneur can’t benefit from macro-scale insight unless his own plans begin at the micro -scale.
Some people are strong, some are weak, some are geniuses, some are dullards— but most people are in the middle. Plot where everyone falls and you’ll see a bell curve:
Since so many founders seem to have extreme traits, you might guess that a plot showing only founders’ traits would have fatter tails with more people at either end.
Almost all successful entrepreneurs are simultaneously insiders and outsiders. And when they do succeed, they attract both fame and infamy. When you plot them out, founders’ traits appear to follow an inverse normal distribution:
The famous and infamous have always served as vessels for public sentiment: they’re praised amid prosperity and blamed for misfortune.
Companies that create new technology often resemble feudal monarchies rather than organizations that are supposedly more “modern.” A unique founder can make authoritative decisions , inspire strong personal loyalty, and plan ahead for decades. Paradoxically, impersonal bureaucracies staffed by trained professionals can last longer than any lifetime, but they usually act with short time horizons.