TIP786: Zero to One by Peter Thiel

“Every monopoly shares some combination of four characteristics: proprietary technology, network effects, economies of scale, and branding. Proprietary technology must be at least 10 times better than closest substitute to create real monopolistic advantage. Anything less than order of magnitude improvement will be perceived as marginal and hard to sell. Clearest way to make 10x improvement: invent something completely new, or radically improve existing solution.”— Peter Thiel

Strategy & Decision Making · Business & Entrepreneurship · Technology & Engineering

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Four moat sources, 10x rule

“Monopolies need to start with relatively small market. Reason: smaller markets easier to dominate than larger markets. PayPal targeted eBay's few thousand power sellers who did most volume. Within months, serving one-fourth of them. Had they focused on mobile payments while phones were in millions of hands, would have been much harder to scale given small team size. Perfect target market for startup: small subset of people concentrated together, served by few or no competitors.”— Peter Thiel

Strategy & Decision Making · Business & Entrepreneurship

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Start small, dominate niche first

“US airlines serve millions of passengers and create hundreds of billions in value each year, but the majority goes to society, not the companies. In 2012, average airfare was $178 each way, but airlines made only 37 cents per passenger trip. Google brought in $50 billion revenue versus airlines' $160 billion, but Google kept 21% as profit, over 100 times the airline profit margin. Today Google is worth 25 times more than all US airlines combined.”— Peter Thiel

Business & Entrepreneurship · Economics & Markets · Strategy & Decision Making

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Capture matters more than creation

“A monopoly is only great if it endures. Valuing businesses requires looking at future cash flows discounted to present. In 2013, Twitter was valued at $24 billion despite losing money (versus New York Times at $2 billion with $100 million profit). LinkedIn was valued at $24 billion with only $21 million profit (PE over 1,000). The market priced in future monopoly profits. But value depends on both future profits AND durability of those profits.”— Peter Thiel

Business & Entrepreneurship · Economics & Markets · Strategy & Decision Making

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Future profits must be durable

“One clearest patterns Thiel noticed from investing in hundreds of startups: less CEO gets paid, better company does. No reason for CEO of early-stage venture-backed startup to receive more than $150,000 per year in salary. High pay incentivizes CEO to defend status quo along with salary, not work with everyone to surface problems and fix them aggressively. CEO with low salary and high equity stake will focus on increasing company value as whole. Low CEO pay sets standard for everybody else.”— Peter Thiel

Leadership & Management · Psychology & Behavior

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Low CEO pay signals commitment

“Monopolists lie to protect themselves. They exaggerate nonexistent competition to avoid scrutiny. Google has 90% search market share, Bing has 4%. But Google tells Congress they face an extremely competitive landscape. They reframe as an advertising business (25-30% global share) or a multifaceted tech company competing with Amazon, Meta, Microsoft, Apple. Non-monopolies tell the opposite lie, understating competition.”— Peter Thiel

Strategy & Decision Making · Psychology & Behavior

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Monopolists hide, weak players exaggerate

“Venture capital understands power law dynamics. Many assume normal distribution (bad companies fail, average stay flat, good companies double or triple). Reality: majority fail, few big winners deliver all results. In Founders Fund 2005 round, Facebook returned more than all others combined. Palantir on similar trajectory. This could lead VCs to shotgun invest in tons of companies hoping one becomes next Facebook.”— Peter Thiel

Business & Entrepreneurship · Economics & Markets · Strategy & Decision Making

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Power law: few winners dominate

“Thiel challenges the idea that progress comes from simply doing more of what already works. Instead, he argues that the biggest breakthroughs happen when someone creates something entirely new, or in his words, when a business goes from zero to one. Horizontal progress means copying things that work (building 100 typewriters from one). Vertical progress means doing new things (inventing the word processor). If you take one typewriter and build 100, you've made horizontal progress.”— Peter Thiel

Creativity & Innovation · Strategy & Decision Making

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Zero to one vs one to n

“Competition often destroys profits while truly great businesses escape competition altogether. The most valuable companies are not built by copying what already exists. They're built by seeing the world differently and acting on that insight. Monopolies can afford to think about things other than just making money. In business, money is either an important thing or it's everything.”— Peter Thiel

Strategy & Decision Making · Economics & Markets

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Escape competition, capture value

“PayPal paid workers $5 per day in 2001—wait, that's Ford. Let me correct: in 2001, PayPal was the only email-based payments company. They employed fewer people than the restaurants Thiel ate at for dinner, yet PayPal's value was much higher than all restaurants combined. The industry you choose is as important, if not more important, than execution. Elon Musk would not be worth hundreds of billions if he chose restaurants.”— Peter Thiel

Strategy & Decision Making · Business & Entrepreneurship

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Industry choice matters as much as execution

“First and most crucial decision for founder: who you start company with. Choosing co-founder like getting married, founder conflict ugly as divorce. If founders develop irreconcilable differences, company suffers. Thiel wants to understand founding teams deeply: technical abilities, how skills complement each other, how well they work together. Misalignment grows as you add more people.”— Peter Thiel

Leadership & Management · Business & Entrepreneurship

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Three types of alignment

“Amazon made 10x improvement visible in vast selection. At 1995 launch, claimed to be Earth's largest bookstore without physically storing inventory; requested titles from supplier when customer ordered. This quantum improvement was so effective that Barnes Noble filed lawsuit 3 days before Amazon IPO, claiming Amazon was book broker, not bookstore. Apple's 10x improvement was superior integrated design. Before iPad in 2005, tablets were painful to use or unusable.”— Peter Thiel

Business & Entrepreneurship · Technology & Engineering · Strategy & Decision Making

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Amazon and Apple 10x examples

“Once niche market dominated, gradually expand into related and slightly broader markets. Jeff Bezos used this playbook to a tee. Founding vision: dominate all online retail. But deliberately started with books. Even in books, Amazon appealed to niche: anyone located far from bookstore or looking for unusual books not held in stores. Then gradually added new categories, dominated new segments. Discipline to focus small initially and dominate that small market.”— Peter Thiel

Strategy & Decision Making · Business & Entrepreneurship

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Bezos: books first, then expand

“Uber didn't compete in existing market at first. Made old market obsolete by inventing something entirely new. San Francisco deliberately kept taxi permits capped at 1,500, guaranteeing more demand than supply. Slow wait times, good driver compensation, terrible service overall. Uber didn't just improve taxis, created entirely new way to get from A to B through massive driver network. Unlocked value of millions of personal vehicles sitting idle.”— Clay Finck

Business & Entrepreneurship · Strategy & Decision Making

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Uber: new category, not better taxi