Book Review: ZERO to ONE by Peter Thiel

Ian Cassel Blog, Book Reviews 7 Comments

Have you ever read an article or book that defined something that you’ve abstractly believed for years? When you read it you let out an affirmative mental “aha!”. I had one of these moments recently when I read Zero to One by Peter Thiel. This book helped shape and better define my investment strategy.

Far too often I see a microcap company’s investor presentation start off with some enormous addressable market ($20 billion, $100 billion, etc) and what follows is “If we just capture 2%….”. This has always annoyed me because in many ways the worst thing an undercapitalized public microcap can do is try to attack a huge highly competitive market.

In Zero to One, Peter Thiel talks about how small emerging companies/and investors need to take the opposite approach. In simple terms, aim for monopoly, competition is for losers. Monopolies have far greater profits, pricing power, and ability to think long-term. For small companies like microcaps to be a monopoly they need to focus on dominating a small market that is expanding, and then further grow into other complimentary markets. “Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away.” When a company dominates a market (large or small) it is much more profitable and valuable then one owning 1% of a large competitive market.

Peter Thiel’s lecture: Competition is for Losers:

When I look back at some of the best microcap performers they too had this characteristic of dominating a small market that is expanding rapidly. These companies normally have high organic growth rates, profitability, and pricing power. These powerhouse businesses can fund high rates of growth from internal cash flows. Their market leadership and profitability allows them to make longer-term strategic decisions that provide an even wider moat.

I highly recommend reading ZERO to ONE.

You will also enjoy: First…Dominate a Small Market 

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Comments 7

  1. Ian, your piece this morning reminded me of something I read years ago in John D. Rockefeller’s autobiography, “Random Reminiscences of Men and Events”

    “…It is supprising how many businessmen go into important undertakings with little or no study of the controlling conditions they risk their all upon.”

    “…avoid the unnecessary duplication of existing industries. He would regard all money spent in increasing needless competition as wasted, and worse. The man who puts up a second factory when the factory in existance will supply the public demand adequately and cheaply is wasting the national wealth and destroying the national prosperity, taking the bread from the laborer and unnecessarily introducing heartache and misery into the world.”

    “Probably the greatest single obstacle to the progress and happiness of the American people lies in the willingness of so many men to invest their time and money in multiplying competitive industries instead of opening up new fields, and putting their money into lines of industry and development that are needed. It requires a better type of mind to seek out and to support or to craete the new than to follow the worn paths of attempted success; but here is the great chance in our still rapidly developing country. The penalty of a selfish attempt to make the world confer a living without contributing to the progress or happiness of mankind is generally a failure to the individual. The pity is that when he goes down he inflicts heartache and misery also on others who are in no way responsible.”

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  2. I agree Ian, Zero to One is a must-read for all business owners (including investors).

    In addition to Thiel’s thinking on monopolies I also took great learning’s from his “7 questions every business must 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 you starting with a big share of a small market?
    • The People Question = Do you have the right team?
    • The Distribution Question = Do you have a way to not just create but deliver your product?
    • The Durability Question = Will your market position be defensible 10 and 20 years from now?
    • The Secret Question = Have you identified a unique opportunity that others don’t see?

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  3. This is really an extraordinary book Ian, especially on second reading and then when writing up your own notes!

    Thiel’s thinking on Monopolies is provocative and worthy of granular understanding – my take outs below:

    • Monopoly
    o Company that’s so good at what it does that no other firm can offer a close substitute
    o Monopolies give customers more choices by adding entirely new categories of abundance to the world
    o They bring new products that benefit everybody and sustainable profits for the creator
    • The history of business success is the history of better monopoly businesses replacing incumbents
    • Every business is successful exactly to the extent that is does something others cannot
    • Monopoly is the condition of every successful business
    • All successful companies earn a monopoly by solving a unique problem
    • All failed companies do not escape competition – competition means no meaningful differentiation, less profits and a struggle to survive
    • Recognise competition as a destructive force instead of a sign of value

    Characteristics of a Monopoly
    • Proprietary Technology
    o Must be 10x better than the closest substitute in some important dimension
    o Makes your product difficult or impossible to replicate
    • Network Effects
    o Product must be valuable to the first users (even when the network is small)
    o These businesses must start with especially small markets
    o Product becomes more useful as more people use it
    • Economies of Scale
    o Business gets stronger as it gets bigger
    o The fixed costs of creating the product can be spread over greater quantities of sales
    o A great startup should have the potential for great scale built into its first design
    • Branding
    o Creating a strong brand is a powerful way to claim a monopoly

    Building a Monopoly
    • Start small and monopolise
    o Every start up should start with a very small market
    o If you think your market is too big, it almost certainly is
    o Small does not mean non-existent
    o The perfect market is a small group of particular people concentrated together and served by few or no competitors
    • Scaling up
    o Once you create and dominate a niche market, then you should gradually expand into related, and slightly broader, adjacent markets
    o Make this progression a part of your founding narrative
    • Don’t disrupt
    o As you craft a plan to expand to adjacent markets, don’t disrupt: avoid competition as much as possible
    o Focus on something you’re good at doing that will be valuable in the future
    • The last will be first
    o It’s much better to be the last mover and enjoy years of monopoly profits

  4. HI Ian. I was wondering if I can get your input on the use of historic performance to judge management.

    A lot of people I know look at a company’s growth and profits and if the company performed poorly, then they immediately rate the CEO as bad/ terrible. I have seen some companies where they had the same founder CEO for over a decade and people avoided the company because it was never profitable for over a decade, but once it started becoming profitable people still avoided it until the company became a multibagger.
    People say historic performance is a good predictor of future performance, but there’s something about that logic that seems flawed. It assumes that management will keep doing what they’re doing, which may be true but not always. That’s just like saying Ian was a terrible investor for his first 5 years, hence he will be a terrible investor for the next 5 years…… I believe there are some CEOs that can and do learn from their mistakes just like how investors do. I’m not saying it’s easy to spot these CEOs, but one shouldn’t assume a CEO will always be terrible because of past performance.

    Anyone want to add anything?

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