Friday, February 06, 2015

Review: Zero to One

Zero to One is Peter Thiel's short book on how to build startups. It's a very mixed bag, but has a few interesting and important ideas. I'll try to list some of them.

Venture backed up startups shouldn't be funded to achieve "normal" returns. This should drive VC behavior: in other words, there should be no startup in a VC portfolio that do not have the potential to return 10X the rest of the portfolio. Having this discipline means that you only need about 1 in 10 startups to succeed to pay for the entire portfolio of companies. This is a very strong point, but he mixes it all up by scoffing at diversification. What you have to understand is that Thiel isn't just writing a book teaching you about startups. He's a sales person. He succeeds by convincing you (or the founders at any rate), that diversification is for wussies, and that you should bet it all on huge thing while behind the scenes he's practicing diversification by investing in lots of startups with his huge portfolio.

Another interesting point is that the goal of a company is to create products that have no close substitutes so as to enjoy monopoly profits. This is true. Warren Buffett has also frequently expressed the need to have a big moat around business you would invest in. On the other hand, we do have tons of startups all searching for that next monopoly, so it's not as easy as just he says.

Sales is important. This is a big deal, because most tech startups are founded by nerds who hate sales and marketing. This chapter is a great read for every nerd-turned-entrepreneur, and he points out that most sales jobs are named something else (e.g., "Account Executive") so that the customers aren't alerted to the fact that a sales person is talking to them. He also points out that Palantir's sales are so big that the CEO is effectively the company's sales person.

There are some other interesting titbits about various companies founded and run by the Paypal mafia, but a lot of what Thiel says has to be filtered by your B.S. filter: the man is self-serving to the nth degree, so the entire book is a sales job. In one chapter he grudgingly admits that if you examine the odds of success objectively, it makes more sense not to found startups, but to join one that's clearly on the trajectory towards outsized success (e.g., Google or Facebook before the IPO, and now probably Dropbox, AirBnB, Uber, and a  handful of others).

I hate to slap a recommended label on this book, but it's so short that you can read it in a couple of hours, so I'd say it's worth a read, provided you take it with a 20 pound burlap sack of salt and watch out for all the places where he's being self-serving.

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