The biggest leaps in progress are vertical (from zero to one) like in the case of technological innovation and not horizontal (one to n) like in the case of globalization. The keys to any successful startup lie in the gaining and capturing value by paying close attention to technology, timing, the competition in an effort to become a monopoly, distribution, durability and business secrets. Founders are typically eccentric risk taking individuals need a long term vision (this vision could be delusional) to take their business from zero to one.
I regret not getting rid of the dust off this book and diving in earlier - great book with great advice about how to spur technological innovation and pragmatically actualize a vision by building a business that starts from a gestation period as a start-up and eventually transmogrifies into a dominating behemoth.
The flow within each chapter was what made reading the book a great experience in addition to the lucid approach undertaken by the author to condense complex ideas into simple concepts. While reading the individual chapters I did find a disconnect between concepts, however, the penultimate chapter concretized the individual lessons incredibly well and bolstered the concepts by providing two very pertinent examples.
The nuggets of wisdom presented in this book were so insightful that I took it upon myself to write notes for each of the chapters. Overall, I highly recommend this book to anyone interested in learning how to make the "secret sauce" of successful start-ups.
- An important question worth asking is "What important truth do very few people agree with you on?".
- The purpose of this question is to highlight the concept that out-of-the-box brilliant thinking is rare and there is perennially a scarcity of genius.
- Technological innovation is an example of vertical growth i.e. from zero to one while globalization is an example of horizontal growth i.e. from one to 'n'.
- Start-ups are the largest group of people you can convince of a plan to build a future.
- In large companies, there is a considerable amount of inertia associated with getting things done.
- Individuals need the help of a team to actualize their ideas.
- Exuberance of the pre-dotcom bubble drove up the stock market and eventually the bubble burst that caused a huge market crash.
- 4 lessons that were/and still are considered a panacea by start-ups but aren't necessarily true:
- Make incremental advances
- Stay lean and flexible
- Improve on the competition
- Focus on product, not sales
- The real 4 lessons that should have been inculcated are:
- It's better to risk boldness than triviality
- A bad plan is better than no plan
- Competitive markets destroy profits
- Sales matter as much as product
- Most contrarian thing is to think for yourself.
- Each happy company earns a monopoly by solving a problem and these happy companies downplay their monopolization.
- Example: Google
- All failed companies fail to escape competition i.e. their profits are eaten away by competition. These non-differentiated companies usually are insecure about not being a monopoly and therefore market themselves as one.
- Example: "Only British restaurant in Palo Alto"
- Ask: What valuable company is nobody building?
- Valuable company is one that creates and retains value.
- If you want to create and capture value: don't build an undifferentiated business.
- War (in business like everywhere else) is destructive.
- Competition eats into the value you can create as a business and value you capture.
- Competition can distract rivals from reaching their business goals.
- For example: Microsoft vs. Google and then Apple came in and swept the smartphone market.
- Even if you create a monopoly, you need to have a valuable business that can be economical sustainable in the future.
- The value of a company today is the discounted value of all the money it will make in the future.
- A great business is defined by its ability to generate cash flows in the future.
- Typically, technology companies lose money for the first couple of years and then start realizing profit if they are valuable.
- An important question worth asking: "Will this business be around 10 years from now?"/
- Characteristics of a Monopoly
- Proprietary technology that is 10x better than existing solution.
- Network effect: to start with a niche market so that word can spread like wildfire.
- Economy of scale: The ability to scale up once an increase in user base takes place.
- Excellent Branding
- Building a monopoly:
- Perfect target market for a startup is a small group of particular people concentrated together and served by few or no competitors.
- Once the market is dominated, expand to adjacent markets.
- Don't disrupt as it brings negative attention like in the case of Napster and the Music Industry.
- The last will always have an advantage: instead of first mover advantage make the last great development in a specific market and reap the fruits of a mature ecosystem.
- Process trumps substance.
- If you treat the future as something definite it makes sense to understand it in advance and to work to shape it. But if you expect and indefinite future ruled by randomness, you’ll give up on trying to master it.
- 4 Ways To Treat the Future:
- Indefinite pessimism: Europe since 1970s.
- Definite pessimism: China's economic growth cannot come fast and sustainable enough.
- Definite optimism: USA before 1970s.
- Indefinite optimism: USA after 1970s.
- It's not luck that makes companies big: a start-up is the largest endeavor over which you can have definite mastery.
- You aren't a lottery ticket.
- Money makes money.
- Compounding interest is the 8th wonder of the world.
- Pareto Principle: 20% own 80%.
- We don't live in a "normal" (think Gaussian) world but a world that's afflicted by the Power Law i.e. exponential distribution.
- Power Law becomes visible in all things in the universe.
- In venture capital, investors try to profit from exponential growth in early-stage companies, a few companies attain exponentially greater value than all others.
- They diversify only to hedge their bets.
- Biggest investments with the best returns equals or outperforms the rest of the fund combined.
- Only invest in companies that have the potential to return the value of the fund.
- In venture capital, investors try to profit from exponential growth in early-stage companies, a few companies attain exponentially greater value than all others.
- The most important application of the power law to start-up management is to aim singularly i.e. dominate one market better than others to reduce competition.
- Why aren't people looking for secrets?
- Incrementalism: we should do one thing at a time.
- "If you over achieve and it's not on the test, you have wasted your time".
- Risk Aversion: Scared of being wrong
- Complacency: "Why look out for secrets if there is cash flowing in."
- Flatness
- Homogeneity of globalization has got us thinking "I am sure someone has already thought of this."
- Incrementalism: we should do one thing at a time.
- How to find secrets
- The best place to look for secrets is where no one else is looking.
- 2 types of secrets:
- Nature
- People
- What to do with secrets
- Rarely good to tell everybody everything that you know.
- You should tell anyone who needs to know and no more.
- Every great business is built 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 conspirator.
- Beginnings are special - they are qualitatively different from all that comes afterward.
- Thiel's Law: A start up messed up in its foundation cannot be fixed.
- Bad decisions early on are very hard to correct later.
- Founding Matrimony
- Choosing a co-founder is like getting married. Founder conflict is as messy as a divorce.
- Technical abilities and complementary skills of founders matters.
- Founders should have a prehistory otherwise they are rolling dice.
- Ownership, Possession and Control
- Ownership: Who legally owns the equity
- Possession: Who runs the company on a day to day basis
- Control: Who formally governs the company's affairs
- Suggestions and Observations
- Most conflicts erupt between ownership and control.
- In the boardroom:
- Less is more.
- 3 is ideal.
- On the Bus or Off
- Everyone involved should be fulltime.
- Anyone who doesn't own stock options / regular paycheck is misaligned.
- Cash Is Not King
- Payouts should be in stocks + stock options.
- In no case of an early stage start-up a CEO should be paying himself > $150k.
- Vested Interests
- Equity can’t create perfect incentives, but it’s the best way for a founder to keep everyone in the company broadly aligned.
- Owning equity > getting cash => Long term commitment to the company.
- No company has culture, it is the culture.
- Beyond Professionalism: Since time is your most prized asset, make sure you spend it with people who you envision creating long term future with.
- Recruiting Conspirators
- Why should someone join your company as the 20th engineer while they could join __ company for more money and prestige?
- Answers about your mission: you'll attract good people if you can explain to them why your mission is compelling.
- Why you are doing something important no one else is getting done.
- Answers about the team: how the person will be a unique match for the team.
- Answers about your mission: you'll attract good people if you can explain to them why your mission is compelling.
- Why should someone join your company as the 20th engineer while they could join __ company for more money and prestige?
- From outside, everyone in your company should be different in a similar way.
- On the inside, every individual should be sharply distinguished by their work.
- Do ONE thing.
- Build a cult or a mafia and not a nihilistic consultant group.
- Startups should care about sales just as much as they care about the product.
- People underestimate the difficulty of sales and overestimate the difficult of science and engineering.
- All sales people are actors: persuasion, not sincerity, is their priority.
- Sales works best when hidden - sales involves distribution.
- Everyone is inherently a salesman pitching their value.
- Superior sales and distribution by itself can create monopoly without product; the converse isn't true.
- Distribution can be the bottleneck for the product.
- CLV (Customer Lifetime Value) > CAC (Customer Acquire Cost).
- The more the returns from retaining a customer are, the higher your value you'll be retaining as you'll be covering the amount of the cost of getting more customers.
- The more expensive the product, the bigger sales costs, therefore, the more important to sale.
- Globalization is substitution while technology is complementary.
- A hybrid of human and machine will solve problems better.
- Every successful business model should answer:
- The Engineering question: Can you create breakthrough technology instead of incremental improvements?
- The Timing question: Is now the right time to start your particular business?
- The monopoly question: Are starting with a big share from a small market?
- The people question: Do you have the right team?
- The distribution question: Do you have a way to deliver your product?
- The durability question: Will your market position be defensible 10 and 20 years into the future?
- The secret question: Have you identified an unique opportunity that others don’t see?
- Tesla had all 7 questions answered compared to other cleantech companies.
- Founders are important not because they are the only ones who’s work has value, but rather because a great founder can bring out the best work from everybody at his company.
- The greatest danger for a founder is to become so certain of his own myth that he loses his mind. But an equally insidious danger for every business is to lose all sense of myth and mistake disenchantment for wisdom.
- The essential first step is to think for yourself. Only by seeing our world anew, as fresh and as strange as it was to the ancients who saw it at first, can we both re-create it and preserve it for the future.