A Radical Manifesto for Tech Pioneers: Peter Thiel's Zero To One is Thomas Paine's Common Sense

In his provocative book, Zero To One, Peter Thiel offers a view of entrepreneurship that is radical, in the original sense of the word. That is, it goes to the root of entrepreneurship: how to take bold risks to create a better future. Thiel believes that an entrepreneur should build a lasting company, not merely a successful one. One that is, by his definition, a defensible and durable monopoly and generates significant future cash flow. In this context, monopoly is not a pejorative term but a definition of sustainable business advantage over time. And what kind of entrepreneurs are needed to build such companies? Those who have a revolutionary zeal to pursue their goals matched with the ability to bend nature and consumers to their will. This is not a hand book for building a run-of-the-mill company to cash in on the latest tech trend. It is a pamphlet for tech founders who aim to pioneer new industries and conquer new worlds in some cases literally as in Elon Musk’s ambition to colonize Mars.

 

And as pamphlets go, Thiel’s Zero To One has a few elements in common to the Thomas Paine’s Common Sense. Once you get past the obvious differences in form, content and style between the two pamphlets, you notice a common purpose: to persuade the reader to question the conventions of current rulers, to come down from the fence and embrace a new, radical order. For Paine, the purpose of his pamphlet was to rid monarchy and gain support for constitutional democracy based on liberty. He crafted his message to appeal to the commoners of his era. Similarly, Zero To One has the polemical style designed to appeal to today’s revolutionaries: the entrepreneurs. Thiel rails against the culture of risk aversion and the current obsession among founders with incremental innovations (“We wanted flying cars, instead we got 140 characters”). He asks for a bold future in which technology pioneers run global, monopolistic companies to improve and extend human life. Like Paine, Thiel offers a recipe on how to achieve this future.  

 

In brief, here is Thiel's manifesto, as I interpret it, for the tech pioneers of today. 

 

Thiel begins with an insight on how to identify the kind of company nobody else is building.  Unlike most investors who ask founders to start with a vision, he asks them to be begin with a secret. He is right in that a vision is a dangerously vacuous endeavor. When asked to espouse one, most founders are prone to hyperbole of market trends ("social meets cloud meets internet of things, kind of like Uber for mono-cyclists)”.  Others simply extrapolate their product into the future.  In most cases, the founder's vision is simply an imagined set of uses of inflated product features targeted at all and sundry.

 

However, Thiel defines a secret in more precise terms. A secret is as an insight shared by the founder about the state of the future which is not generally accepted by others, and often contrary to popular beliefs prevailing in the market. There are of two kinds of secrets uncovered by an entrepreneur: those of nature (e.g. Shockley et al invented transistor) and those of people (e.g. Zuckerberg perfected how humans share photos online).  So, the founder must invent or discover a secret, as the first step; then develop a definitive view of how the secret shall affect the future. Not surprisingly, most entrepreneurs fall short here since they are not pioneers. They would rather build a product than an industry.  

 

For the pioneer with a newly minted secret, the next step is to attract others who agree with the truth of the secret. According to Thiel, “a startup is the largest group of people you can convince of a plan to build a different future.” This shared view of a different future is what animates the cabal of early employees, investors and customers. It is the unique way the startup solves the problem that offers the basis of building a long-term monopoly - and a happy company. Happy as in successful: well payed employees, richly rewarded investors and satisfied customers. Again, think Google, Facebook and Tesla. The mantra is: "All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape competition.” But how exactly does a startup engineer a monopoly? 

Thiel lists four characteristics of a technology-based company that can create a monopoly position. Of course, the foundation should be the technology; it must be an order of magnitude better than available alternatives - and it must be proprietary. To be ten times better is a good rule of thumb in most industries. The second factor is to generate network effect; that is, the technology should be adopted rapidly among consumers through word of mouth and social recommendations, or in case of business, through enterprise endorsements and references. Ultimately, the evidence of network effect is that the value of technology increases with adoption of its usage by every new member. But to achieve this effect, Thiel suggests that founders should bootstrap companies in a niche. They should fine-tune, prove and build the positive effect of networks in a niche market for which the technology is ideally suited before casting it wider to broader but less suitable audiences. This shall keep the company under the radar, away from competitive attention. Third, once the technology and its adoption is underway, the company should build the economy of scale - that is, expand with lowest cost curve - with the goal to deepen its competitive moat. And, finally, the company should build and defend its brand to become the de facto standard for the category. While Thiel doesn’t state this, it is clear that the order of things matter. Building a brand comes last, building a 10X technology comes first. The main idea is that the company builds these operations covertly to create a monopoly position while staying away from limelight as long as possible. 

Thiel suggests that a company hide in plain sight. Its secret should attract only the few who believe in it; its operations must run lean until it is ready to draw attention. And, as an interesting corollary, it must ignore competition and not use large established companies as foil. “The act of creation is far more important than the old industries that might not like what you create,” he writes. He observes an interesting use of signaling theory where in "monopolies disguise their monopoly by framing their market as union of several large markets” in order to appear smaller in scale and influence. As evidence, Microsoft and Google in every antitrust suit define their respective markets much more broadly to show their share of it as low as possible. Also, burgeoning monopolies don’t toot their horn and are secretive about their plans.  Incidentally, the opposite is true as well: "non-monopolist exaggerate their distinction by defining their market as the intersection of various smaller markets,” to inflate their influence in them.  They chase the sizzle, make noise in advance of success and often claim “we’re in a league of our own”.  

Finally, Thiel’s advice for those seeking to build a new future is to keep an eye on the prize: the end game. He quotes grandmaster Jose Raul Casablanca: "to succeed, you must study the end game before anything else”.  A pioneer should aim not to be the first in the market but to be the last one standing when the game finishes, and the new order has emerged. This means understanding not just the technology innovation, but the entire ecosystem of partners who come to complement the innovation.

 

In summary, Thiel’s Zero To One is nothing short of a blueprint to build a hegemony of technology titans. Like any call to arms, most entrepreneurs - and their companies - shall never fit the bill since most innovations are derivative in nature. But for the few radical technology pioneers who wish to emblazon a bold future, this is the essential playbook.