#business #startup #strategy

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.

Chapter 1: The Challenge Of The Future

“What important truth do very few people agree with you on?”

Brilliant thinking is rare, but courage is in even shorter supply than genius.

Two forms of progress: Horizontal and Vertical. Horizontal or extensive progress means copying things that work (globalization) - going from 1 to n. Vertical or intensive progress means doing new things (technology) - going from 0 to 1.

Most people think the future of the world will be defined by globalization, but the truth is that technology matters more. 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.

What a startup has to do: question received ideas and rethink business from scratch.

Chapter 2: Party Likes It's 1999

Four big lessons from the dot-com crash that still guide business thinking today:

1. Make small incremental steps. Anyone who claims to be able to do something great is suspect.
2. Unplanned. Planning is inflexible. Instead you should try things out, iterate and treat entrepreneurship as agnostic experimentation.
3. Don't try to create a new market prematurely. Start with an already existing customer. Improving on recognizable products already offered by successful competitors.
4. Focus on product, not sales. If your product requires advertising or salespeople to sell it, it's not good enough. Bubble-era advertising was obviously wasteful, so the only sustainable growth is viral growth.

Yet the opposite principles are probably more correct:

1. It is better to risk boldness than triviality.
2. A bad plan is better than no plan.
3. Competitive markets destroy profits.
4. Sales matters just as much as product.

How much of what you know about business is shaped by mistaken reactions to past mistakes?

Chapter 3: All Happy Companies Are Different

Creating value is not enough - you also need to capture some of the value you create.

Capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.

Monopolists lie to protect themselves. They don't want to be audited, scrutinized, and attacked. They want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly - usually by exaggerating the power of their (nonexistent) competition.

Non-monopolists tell the opposite lie: “we're in a league of our own.” Entrepreneurs are always biased to understate the scale of competition. The fatal temptation is to describe your market extremely narrowly so that you dominate it be definition.

When you hear that most new businesses fail within one or two years, your instinct will be to come up with a story about how yours is different. It would be better to pause and consider whether that's true. It's very possible that the market don't exist.

Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets: British food ⋃ restaurant ⋃ Palo Alto. Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets: search engine ⋃ mobile phones ⋃ wearable.

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. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

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 government knows this: that's why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases.)

The history of progress is a history of better monopoly businesses replacing incumbents.

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. (See: Bell Labs)

Monopoly is the condition of every successful business.

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.

Chapter 4: The Ideology Of Competition

We compare business to war, but it’s only competition which is like war.

Romeo and Juliet: “Two households, both alike in dignity.” The two houses are alike, yet they hate each other. They grow even more similar as the feud escalates. Eventually, they lose sight of why they started fighting in the first place (See: Microsoft and Google rivalry)

Amid all the human drama, people lose sight of what matters and focus on their rivals instead.

Rivalry causes us to overemphasize old opportunities and slavishly copy what has worked in the past. Rivalry causes imitation (See: 2010 Square Credit Card Reader)

Winning is better than losing, but everybody loses when the war isn't one worth fighting.

Competition is destructive and distracting.

Chapter 5: Last Mover Advantage

A great business is defined by its ability to generate cash flows in the future. Investors expect Twitter will be able to capture monopoly profits over the next decade, while newspapers' monopoly days are over. Simply stated, the value of a business today is the sum of all the money it will make in the future.

Comparing discounted cash flows shows the difference between low and high growth businesses: Most of the value of low-growth businesses is in the near term. High-growth companies follow the opposite trajectory. They often lose money for the fist few years: it takes time to build valuable things, and that means delayed revenue.

For a company to be valuable it must grow and endure.

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? Numbers alone won't tell you the answer; you mush think critically about the qualitative characteristics of your business.

Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.

As a good rule of thumb, proprietary technology must be at least 10x better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Once you're 10x better, you escape competition.

Every startup is small at the start. Every monopoly dominates a large share of its market. Therefore, every startup should start with a very small market.

Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets.

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.

Avoid competition as much as possible.

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

“In order to improve your game, you must study the endgame before everything else, for whereas the endings can be studied and mastered by themselves, the middle game and the opening must be studied in relation to the endgame.” ― José Raúl Capablanca

Chapter 6: You Are Not A Lottery Ticket

Indefinite view: When people lack concrete plans to carry out, they follow 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. To be a monopoly of one.

Four perspectives you can have about the future:

(1) Indefinite Pessimism: An indefinite pessimist looks out onto a bleak future, but he has no idea what to do about it. They just react to events as they happen and hope things don't get worse (Europe, present).

(2) Definite Pessimism: A definite pessimist believes the future can be known, but since it will be bleak, he must prepare for it (China, present).

China can grow so fast because its starting base is so low. The easiest way for China to grow is to relentlessly copy what has already worked in the West (execute definite plans).

(3) Definite Optimism: 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. 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.

(4) Indefinite Optimism: To an indefinite optimist, the future will be better, but he doesn't know how exactly, so he won't make any specific plans (U.S., present). Instead of working for year to build a new product, indefinite optimists rearrange already-invented one (keep options open).

Finance epitomizes indefinite thinking because it's the only way to make money when you have no idea how to create wealth (portfolio of small bets). Only in a definite future is money a mean to an end, not the end itself.

Indefinite politics: We are more fascinated today by statistical predictions of what the country will be thinking in a few weeks' time than what the country will look like 10-20y from now. Another example: The government used to be coordinate complex solutions to problems like atomic weaponry and lunar exploration. But today, the government mainly just provides insurance (medicare, social security).

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

Chapter 7: Follow The Money

We don't live in a normal world; we live under a power law.

VC's “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. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you'll miss those rare companies in the first place.

The best successful fund equals or outperforms the entire rest of the fund combined. Every single company in a good venture portfolio must have the potential to succeed at vast scale.

Everybody is an investor. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now.

“Don't put all your eggs in one basket,” everyone has been told. As we said, even the best venture investors have a portfolio, but investors who understand the power law make as few investments as possible.

But life is not a portfolio, you cannot run dozens of companies at the same time and then hope that one of them works out well.

In a power law world, you can't afford not to think hard about where your actions will fall on the curve.

Chapter 8: Secrets

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.

A conventional truth can be important but it won't give you an edge. It's not a secret.

The prospect of being lonely but right - dedicating your life to something that no one else believes in - is already hard. The prospect of being lonely and wrong can be unbearable.

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.

Great companies can be built on open but unsuspected secrets about how the world works (see: Airbnb, Uber)

There are two kinds of secrets: secrets of nature and secrets about people. Natural secrets exist all around us; to find them, one must study some undiscovered aspect of the physical world. Secrets about people are different: they are things that people don't know about themselves or things they hide because they don't want others to know.

If you find a secret, you face a choice: Do you tell anyone? Or do you keep it to yourself?

In practice, there's always a golden mean between telling nobody and telling everybody - and that's a company. 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; when you share your secret, the recipient becomes a fellow conspirator.

Chapter 9: Foundations

Thiel's law: a startup messed up at its foundation cannot be fixed.

Choosing a co-founder is like getting married, and founder conflict is just as ugly as divorce.

Technical abilities and complementary skills 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.

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.

Equity is the one form of compensation that can effectively orient people toward creating value in the future.

Early employees usually get the most equity because they take more risk, but some later employees might be even more crucial to a venture's success. Since it's impossible to achieve perfect fairness when distributing ownership, founders would do well to keep the details secret.

Chapter 10: The Mechanics Of Mafia

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.

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.

Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?

The bad answers are: valuable stock, smart people, or challenging problems. Every company makes these claims, so they won't help you stand out.

The only good answer are specific to your company (team, mission). Why you're doing something important that no one else is going to get done?

Above all, don't fight the perk war. Anybody who would be more powerfully swayed by free laundry pickup or pet day care would be a bad addition to your team.

Everyone at your company should be different in the same way - a tribe of like-minded equally-obsessed people fiercely devoted to the company's mission.

Make every person in the company responsible for doing just one thing. Most fights inside a company happen when colleges compete for the same responsibilities. Defining roles reduced conflict. More than that, internal peace is what enables a startup to survive at all.

In the most intense kind of organization, members hang out only with other members. They abandon the outside world. In exchange, they experience strong feelings of belonging: a cults.

The extreme opposite of a cult is a consulting firm: not only does it lack a distinctive mission of its own, but individual consultants are regularly dropping in and out of companies to which they have no long-term connection whatsoever.

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.

Chapter 11: If You Build It, Will They Come?

Engineers are biased toward building cool stuff rather than selling it. But customers will not come just because you build it. You have to make that happen, and it's harder than it looks.

Advertising doesn't exist to make you buy a product right away; it exists to embed subtle impressions that will drive sales later.

All salesmen are actors: their priority is persuasion, not sincerity. If you don't know any grandmasters, it's not because you haven't encountered them, but rather because their art is hidden in plain sight.

Superior sales and distribution by itself can create a monopoly, even with no product differentiation. The converse is not true.

Metric: Customer Lifetime Value (CLV) > Customer Acquisition Cost (CAC)

Complex Sales: It might take months to develop relationships. You might make a sale only once every 1-2 years (see: SpaceX's NASA contract, Palantir)

Complex sales works best when you don't have “salesmen” at all. At that price point, buyers want to talk to the CEO, not the VP of Sales.

Strategy for complex sales: start small, use smaller deals to sale even bigger deals.

Dead Zone: Either too broad, e.g. TV channel, or too inefficient, e.g. having an actual sale person to talk to every customers.

A product is viral if its core functionality encourages users to invite their friends to become users (See: Facebook, PayPal, YouTube)

Whoever is first to dominate the most important segment of a market with viral potential will be the last mover in the whole market.

Don't acquire more users at random; acquire the most valuable users first (See: PayPal eBay's PowerSellers market)

Distribution follows a power law of its own. The kitchen sink approach - employ a few salespeople, place some magazine ads, and try to add some kind of viral functionality to the product as an afterthought - doesn't work.

Your company needs to sell more than its product. You must also sell your company to employees and investors, also media.

All of us want to believe that we make up our own minds, that sales doesn't work on us. But it's not true. Everybody has a product to sell - no matter whether you're an employee, a founder, or an investor.

Chapter 12: Man And Machine

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.

How can computers help humans solve hard problems?

Strong AI is like a cosmic lottery ticket: if we win, we get utopia; if we lose, Skynet substitutes us out of existence.

Indefinite fears about the far future shouldn’t stop us from making definite plans today.

Chapter 13: Seeing Green

Seven questions that every business must answer:

1. Engineering: Can you create breakthrough technology instead of incremental improvements?
2. Timing: Is now the right time to start your particular business?
3. Monopoly: Are you starting with a big share of a small market?
4. People: Do you have the right team?
5. Distribution: Do you have a way to not just create but deliver your product?
6. Durability: Will your market position be defensible 10 and 20 years into the future?
7. Secret: Have you identified a unique opportunity that others don't see?

An entrepreneur can't benefit from macro-scale insight unless his own plans begin at the micro-scale.

Chapter 14: The Founder's Paradox

Some people are strong, some are weak - but most people are in the middle. Plot where everyone falls and you'll see a bell curve.

Normally we expect opposite traits to be mutually exclusive: a normal person can't be both rich and poor at the same time. But it happens all the time to founders: startup CEOs can be cash poor but millionaires on paper. Sullen jerkiness and appealing charisma. Insiders and outsiders. Fame and infamy. Founders' traits appear to follow an inverse normal distribution.

Conclusion: Stagnation Or Singularity?

Four possible patterns for the future of humanity:

1. Recurrent Collapse: A neverending alternation between prosperity and ruin.
2. Plateau: A plateau of development. In this scenario, the future will look a lot like the present.
3. Extinction: A collapse so devastating that we won't survive it.
4. Takeoff: Accelerating takeoff toward a much better future.