Zero to One by Peter Thiel

According to Peter Thiel, there are two kinds of strategies in business – one is copying what already works or horizontal / extensive progress. The other is doing completely new thing or vertical / intensive progress. This book is mostly about the latter path and hence the title going from Zero to One.

Monopoly is good

We have always been taught that competition is good. Businesses routinely compete fiercely with each other for the same markets. However, the message of this book is that competition is overrated. All great companies usually start not by competing with others but by doing completely new things. The become great by solving a “unique” problem, which is unaddressed by competition.

Durability

The value of a business is the discounted sum of cash flows generated in the future. Hence, almost all the value of the company is in the future, sometimes in the far future. This is especially true of the companies in the technology space since many of these companies have negative cash flows during the initial phase of their existence. That is why the value of a company is a function of the growth rate of the company and its durability. However, durability is even more important than growth. The first question we need to ask is whether the company will be around 10 years from now.

Characteristics of monopoly

  • Proprietary technology
    • Eg. Google search engine
    • It should be a totally new technology. If it is an existing technology, it should be 10x better than the competition
  • Network effects
    • It is important to start with a small market and dominate that first. Eg. Facebook – which started with Harvard and then expanded to other college campuses.
    • On the other hand, companies which start with a small part of a large market dont do as well. Eg. the green tech bubble of 2008.
  • Economies of scale
  • Brand

Building a monopoly

  • Start small and monopolize
    • Perfect target market is a small group of people who are concentrated together so it is easier to reach them. They should be served by few or no competitors.
  • Scale up in adjacent markets
  • Don’t disrupt
    • Avoid competition / confrontation with bigger companies as much as possible

Power law

  • Power law is everywhere and I’m sure you have heard it before. In its investment avatar, it says that 80% (or more) of the returns in your portfolio can be attributed to 20% (or less) of the assets
  • The best investment is a venture fund usually equals or outperforms the entire rest of the fund combined
  • Hence you should invest in companies which have the potential to scale up so that they outperform the entire portfolio
  • When you find such companies, don’t invest small amount. Rather you should load up the truck, and invest substantial sums in them.
  • As a result, a typical fund should have a small number of concentrated positions in the companies with high conviction which qualify under the criteria mentioned above.
  • While a concentrated portfolio has been preferred by value investors such as Warren Buffett. The conventional wisdom in venture investing has been to invest small amounts in a large number of companies due to FOMO. One cannot afford to miss companies such as Facebook, Uber etc. However, Peter Thiel explains how a concentrated approach works very well even for a venture fund. He puts his money where his mouth is by following the same approach is his fund – the Founders Fund.

Value investor

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