Zero to One (by Peter Thiel) Summary - Chapter 5

The following is a summary of Zero to One: Notes on Startups or How to Build the Future. I do not claim to own any of the book's original work, the following is simply a bulleted summarization with a few direct quotes. All copyrights and trademarks belong to their respective owners. Chapter 5 - The Last Mover Advantage:
  • Businesses can only be great if they endure the test of time
    • Great business is defined by its ability to generate cash flow in the future
      • “The value of a business today is the sum of all the money it will make in the future
  • Old economy businesses (Restaurants, newspaper) make money today, but profits usually dwindle in the coming years
  • Technology companies (startups) usually follow the opposite
    • Lose money for the first years
      • It takes time to build value
    • Most value comes 10 to 15 years in the future
  • Because technology companies are usually most valuable in years to come, companies must be durable
  • Side Note:
    • Thiel touches on Zynga and its short term appeal
      • He says that companies cannot reliably produce entertainment products because audiences are fickle
      • Takeaway is that entertainment companies are not good (can’t last)
  • Characteristics of a Monopoly:
  1. Proprietary Technology:
    1. Most substantive advantage a business can have
    2. MUST be 10x better than its closest substitute
      1. Anything less than this is a marginal improvement
      2. Easiest way to improve something 10x better is by inventing something new
  2. Network Effects:
    1. Network effects make a product more useful as more people use it
    2. To reap network effects, the product must be valuable to its very fits users
    3. Network effects must start with small markets
      1. “This is why successful network businesses rarely get started by MBA types: the initial markets are so small
  3. Economies of Scale:
    1. Businesses get stronger as they get bigger
      1. Can produce more for less cost
      2. Software companies get great economies of scale because software costs little to nothing to reproduce
    2. Service business do not benefit much from economies of scale
      1. Can hire more people and spread as much as you want, but profit margin stay relatively the same
      2. A few service people cannot service millions of people and thus cannot achieve massive amounts of users/profit
      3. Good startups have potential for great scale in the design of their companies
        1. There should be no reason your company should stop growing
  4. Branding:
    1. Companies have brand monopoly by definition
      1. So vice versa is true
        1. Creating a brand monopoly will get you the business monopoly
      2. “Beginning with brand rather than substance is dangerous”
        1. No technology can be built on branding alone
  • Building a Monopoly:
    • All of the four characteristics just mentioned defined a monopoly
      • To get those things, “choose your market carefully and expand deliberately”
    • Start small and monopolize
      • Every startup should start with a very small market
        • So that small market can easily be dominated
        • Its easier to dominate a small market than a large one
      • Perfect target market for a startup is a small group of concentrated that are not served by competitors
  • Scaling up
    • “Once you create and dominate a niche market, then you should gradually expand into related and slightly broader markets”
  • Don’t Disrupt
    • Originally disrupt meant firms introducing low price alternatives, and eventually expanding them to take over the high priced premiums
    • Now its a buzzword for new and trendy things
    • If you are truly disrupting, then it is not completely new because firms have already made it
      • Won’t become a monopoly
    • Do not disrupt because it means competition and negative impacts for competitors
      • Instead avoid competition as much as possible
      • Create a mutually beneficial situation for you and possible competitors
  • The last will be the First
    • “If you’re first into a market, you can capture a significant market share”
      • Tactic, not a goal
    • What really matter is generating cash flow in the future
      • Being first doesn’t help if someone overtakes you
    • Better to be the last mover in a market
      • Creating the last move that is so good that it will hold the market for decades, etc.
  If you've liked this summary, I highly recommend you get the full book here: Zero to One: Notes on Startups, or How to Build the Future < Previous Chapter | Overview | Next Chapter > - Alec Kriebel