An Introduction
The famous book written by PayPal co-founder and billionaire entrepreneur Peter Thiel in 2014, Zero to One, encompasses various anecdotes and opinions from his interesting experiences as a startup founder. This is a commentary limited to chapters 4 to 5, since the book has numerous topics throughout the book despite being a relatively easy read. As a disclaimer, this is not a review of Zero to One itself, but my personal take on some of the topics that Thiel introduces.
Zero to One, Chapters: 4 to 5
"War metaphors invade our everyday business language: we use headhunters to build up a sales force that will enable us to take a captive market and make a killing. But really it’s competition, not business, that is like war: allegedly necessary, supposedly valiant, but ultimately destructive"
Within the reference frame of the 4th chapter of Zero to One, the context Thiel uses is that competition is like a conflict or even “war”. The truth is, however, competition is a natural force like the ground pushing on you where you stand against it. In a hypothetical situation where monopolies abound and there is nearly no competition or smaller businesses, the competitive system where a company puts the benefits of those they compete for first no longer exists, driving the worth of consumer’s money into the dirt as inflation reaches a maximum and thus pulling the “roots'' out from the one source of their own economic growth: spending. If you remove the equalizing force of spending power, even the biggest companies will fall through the ground because it is no longer solid: the country it stands on is in a recession or depression.
“ Why do people compete with each other?” The concise answer is: natural free-market forces. Therefore, one should not only focus on the business aspects of monopoly and competition, but also the free-market fundamentals in order to see why competition remains ideal for avoiding the worst situation. Even if there were just twice as many and twice bigger monopolies than there are now, it would shift the balance enough to destroy small businesses and precipitate a recession if left unregulated to freely capitalize on their monopolization of profits.
Unlike the previous chapter, however, Thiel only mentions competition as a segue into talking about the effects of conflict in business. According to Zero to One, there are two types of conflict. Both fall under the category of Karl Marx’s and Shakespeare’s models, which he purports cover “almost every kind of conflict”: either there is a reason to fight due to major differences (like Marx's theory of class conflict), or the two belligerents are actually on the same side but fight for no reason (like in Shakespeare's play, Hamlet).
Throughout most of his book, Thiel uses references to non-business-related subjects like poetry and worldly developments besides technology in order to better explain certain issues and facts that apply to the business world, or more specifically, startups. With these creative analogies, he avoids the complicated business jargon and gets his message across much more nimbly so than otherwise. This time he utilises a reference to Shakespeare’s Romeo and Juliet to convey the result of Shakesperean conflict: the competition among Microsoft and Google in 2012 over releasing similar lines of products in an attitude of one-upmanship just let Apple rise above them at over $400 billion valuation, though it was entirely avoidable if they didn't. In comparison with Romeo and Juliet, Thiel calls it a similar tragedy, "As with all good tragedy, the conflict seems inevitable only in retrospect. In fact it was entirely avoidable." To be fair though, he is viewing this through the profit-driven lens of a company; from the eyes of technological progress and consumers, the innovation sparked by the competition between Microsoft and Google produced a cornucopia of new product lines that changed technology forever. It created new markets, and produced mutual profits for Microsoft, Google, and consumers alike. Thiel is right, competition caused this—and that’s why it is good. In 2020, Apple remained above both Microsoft and Google in valuation, but they’re still way, way up there: who knows what the future of this year or the next holds for either of them if they continue the trend of competitive innovation without fear of the risks.
Following this discussion on conflicts, Thiel talks on the subject of parasitic rivalries— unoriginal companies. Among rivalries, Square is a startup that released credit card readers in 2010, and plenty of scavengers emerged to profit off of Square's idea:
"A Canadian company called NetSecure launched its own card reader in a half-moon shape. Intuit brought a cylindrical reader to the geometric battle. In March 2012, eBay’s PayPal unit launched its own copycat card reader. It was shaped like a triangle—a clear jab at Square, as three sides are simpler than four. One gets the sense that this Shakespearean saga won’t end until the apes run out of shapes." All of this goes to show the method behind the madness: "Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past"
The Square rivalries obviously didn't end up anywhere, as one can only find Square readers in stores and the rest couldn't scavenge enough profit off of unoriginality. It was not worth the effort copying, because only those who do it best get the credit. Like Thiel says, those who are less "sensitive to social cues", are of "single mind", and have a dedication to "making things or programming computers", then put their skills to work avoid ending up with such "obvious prizes" as imitators.
"Other times, rivalry is just weird and distracting." Thiel accounts the rivalries that Oracle navigated and was pulled into with its competitors Siebel Systems and Informix during the 90's. They didn't accomplish much, to say the least: Siebel Systems was just bought by Oracle in 2005, and Informix was brought down by a massive accounting scandal and the CEO Phil White headed to prison for securities fraud.
Personally, Thiel's experiences with rivalries were instructive for him in that he learned "if you can't beat them, join them", or as he says "If you can’t beat a rival, it may be better to merge." His company that he started with Max Levchin in 1998, Confinity, had Elon Musk's X.com as its bitter rival though they worked on the same street. Their feud was met with an end when February 2000 caused them to bail on the squabble in order to keep afloat during the financial crisis of the inflating tech bubble. They merged 50-50, and in his words, "De-escalating the rivalry post-merger wasn’t easy, but as far as problems go, it was a good one to have. As a unified team, we were able to ride out the dot-com crash and then build a successful business."
Thiel does leave a concession in his claim to say that fights and rivalries in business can be necessary yet and still, but in his methodology, any competition should end with one's victorious monopoly: "Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly."
In order to show an alternate perspective, a more natural one than his business-oriented one, which contrasts with his methodology in order to win, Thiel quotes Hamlet’s soliloquy on braveness in the eponymous play, then summarizes, “For Hamlet, greatness means willingness to fight for reasons as thin as an eggshell: anyone would fight for things that matter; true heroes take their personal honor so seriously they will fight for things that don’t matter. This twisted logic is part of human nature, but it’s disastrous in business. If you can recognize competition as a destructive force instead of a sign of value, you’re already more sane than most." Unlike Thiel’s claim, I believe that both competition and the “twisted logic” of human nature are very similar in the fact that, like competition, one cannot simply take human logic out of business. Also like competition, human logic is a natural force that allows business to thrive. Those businesses who surpass the competition by fair practices have to have a very human conviction that likens to Hamlet’s description of the brave person he wants to be. Making a startup work, then, is to use this “twisted logic” of human nature to win in business: to keep fighting over even the smallest victories.
Also, if monopoly is a condition to be a successful business, one needs to compete in their market in order to win in the first place, does that not make logical sense? Competition ties into all business in a fundamental symbiotic relationship, and though it is not without challenges, the benefits far outweigh them. Sure, one can view competition as bad in some contexts, like when Thiel cautions against parasitic competition (copying), or warns that globalization steals consumers away from an entire country’s market. But to blanket any and all competition as “destructive”, and pursue a road where you intend to simply “forgo competition” to be above the rest is more than a bit disingenuous. There are different forms and severities of competition, but if you’re talking about the type of competition of the free-market that aligns with capitalism, that one is absolutely necessary to even get a chance to grow above the other businesses and form a monopoly. Competition begets no competition. So, it is a given that startups want to be the best in their trade and perhaps even dominate the market, but when you get there don’t forget that competition was what allowed you (and Thiel) to do so— it is a vital and life-giving force regardless of its challenges.
In Chapter 5, Thiel begins his analysis on real growth in business by marking that the big difference between the newspaper New York Times and the social media network Twitter is the cash flow, despite Times being profitable when Twitter wasn't. “A great business is defined by its ability to generate cash flows in the future.” Rather, New York Times can be said to have always had less innate value than Twitter because it wasn’t as scalable in the first place. Notably, he says that to make it in Silicon Valley, companies have to “grow and endure”, but investors can be short-sighted and only focus on the short-term growth companies because they are concerned about one thing: durability. They worry because a company can have plenty of cash flow, or future value, but if it can’t endure over the period of promise then investors will just have wasted their money. To the contrary, Thiel argues that companies that have short-term growth can also have signs of bad durability that go unnoticed and cause failure, so one really needs to ask the question: “Will this business still be around a decade from now?”
As he promised in the last chapter, Thiel gives a rundown on what he calls the “characteristics of monopoly”: proprietary technology, network effects, economies of scale, and branding. Proprietary technology is just that technology which a business has possession of as its unique property, and an example of network effects is the Internet becoming more valuable because many people use it rather than few. According to Thiel, you want to improve upon the competitors by 10 times in order to lose the competition, "As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage." However, for network effects one has to have a good plan even for a small user base before it can grow bigger and more valuable. "Network effects make a product more useful as more people use it" but "you'll never reap them unless your product is valuable to its very first users when the network is necessarily small." Thus, unlike proprietary technology, businesses that actually rely on network effects have to be intuitively planned and are rarely made by overly practical people that don’t look beyond the surface, as he says: “Successful network businesses don't get started by MBA types because the initial markets don't even appear to be business opportunities at all.”
The next beneficial element talked about is economies of scale: when a monopoly business gets stronger as it gets bigger, where the fixed costs are spread out over increasing sales. For a corresponding product to this element, Thiel notes that software products have high economies of scale because their marginal cost nears zero.
In the “Branding” section, Thiel purports that creating a strong brand is a powerful way to claim a monopoly, as evidenced by Apple’s rise from the strongly creative CEO Steve Jobs, but no technology company can be built on branding alone as Marissa Mayer tried to accomplish by updating Yahoo!’s image without substance.
All of these elements can be combined in different ways, or used in a more specialized way to focus on a technology product, networking, software or creative type of business. The only big no-go for Thiel is anything with a big market, AKA competition. “Any big market is a bad choice, and a big market already served by competing companies is even worse. This is why it’s always a red flag when entrepreneurs talk about getting 1% of a $100 billion market"
To illustrate the problems with big markets, the first evidence Thiel provides is Jeff Bezos deliberately started with books, rather than going head first into creating Amazon’s current massive selection of wares. Instead, he found that scaling up from a small market is the way to go. As Bezos planned to evolve his big bookstore into an eponymous representation of biodiversity, the current Amazon, he went from just selling books to adding CDs, videos, and software, and kept growing until he made it the world's “general store”. I think that if someone can make a bookstore into a massive online store like Amazon, there are probably many routes to a successful business: one just has to start small. ”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”
Another piece of important evidence Thiel presents on the problem with big markets is Amazon’s competitor, eBay. Of course, since Thiel’s own business Paypal worked with eBay, he had an inside look into the processes and the roadblocks that eBay faced, and as an entrepreneur he also has his own insight in the matter. Instructively, Thiel analyses that eBay ran into an fundamental obstacle in the process of scaling up its offerings: the auction marketplace was a natural monopoly for eBay because it is trusted by both buyers and sellers alike, but it works best for products that are unique and individual like coins and stamps rather than general products, like Amazon. Ebay cannot offer what Amazon can, and vice-versa.
In the next section Thiel talks about a mistake that businesses make: focusing too much on what other businesses think about yours. Disruption is when a company offers a low-price low-end product then improves it and overtakes even the best competitors, however the buzzword definition describes anything trendy and new. When one sees their business through this “disruption” lens they begin to hyperfocus on their business’ position among others rather than their own substance. “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 think of yourself as an insurgent battling dark forces, it’s easy to become unduly fixated on the obstacles in your path." Thiel gives his solution the potential issue of disruption by cautioning that one should not focus on what industries don't like that you create, but the process of creation itself.
A perfect example of a disruptor is given by Thiel’s own former colleague’s business, Napster, which disrupted the music recording industry and got attention but no results, going bankrupt within a year after their rise. Thiel implicates their focus on getting attention and disrupting the existing industry for their gain as the reason they failed so quickly. Rather, his advice to startups is that as you craft a unique plan to bring your business into adjacent markets, “avoid competition as much as possible”. I completely agree with being clever in avoiding competition where you just don’t need to, where we diverge in opinion is just in the fact that free-market competition is a necessary force and not just a burden.
Finalizing his point on being singularly focused on your business and craft, and then exponentially scaling up from a small but well-planned business, he says, “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. In this one particular at least, business is like chess: to succeed, you must study the endgame before everything else. - Grandmaster Jose Raul Capablanca”. The endgame is to be a successful business, and regardless of what path one chooses to take there, one needs to work hard in planning for the eventual future and creating something that pushes the development of the given field forward. That, I can say amen to.